Whilst best known for its Internationally renowned Asset Protection Trusts the Cook Islands also boasts an interesting Private Foundation product. In this article we will take a close a look at the Cook Islands model of Foundation including the legal structure, key features and common uses.
Advantages and Uses
The Cook Islands Foundations Act 2012 was enacted in June 2012. It is a modern and innovative piece of legislation drawing from the experiences and features of foundation law in other financial centres, and adding Cook Islands specialist asset protection provisions.
Validity of a Foundation in the Cook Islands (“CI”)
- A CI Foundation is a separate legal entity from its founder.
- A CI Foundation is valid even if the law in the founder’s jurisdiction does not recognise or prohibits foundations.
A CI Foundation can be used for charitable or non-charitable purposes, inheritance and estate planning, wealth management.
Protection from Creditors
- A two year statute of limitations on claims to set aside the foundation or attack the transfer of an asset to the foundation.
- Courts cannot recognise or enforce a foreign judgment against the foundation.
- Stringent fraudulent transfer rules that make it difficult for creditors to bring a claim for fraudulent transfer.
- A CI Foundation stands independent from the founder’s personal circumstances. The foundation cannot be void or voidable in the event of the founder’s bankruptcy, insolvency, or liquidation.
Cook Islands Foundations – Management
- Founder establishes rules that govern the operation of the foundation.
- Foundation is managed by a board, allowing for input from a number of relevant persons.
Foundation Supervisor or Enforcer
The CI Foundations Law recognises someone to oversee the board’s management of the foundation, an ‘enforcer’ or ‘supervisor’.
Strict privacy laws against disclosure of the affairs of the foundation.
Cook Islands Foundations -Investment Opportunities
- A CI Foundation can derive earning from investments/broad investment powers may be authorised in the foundation rules.
- A CI Foundation cannot be used for regular trade or commercial activity.
A CI Foundation and its beneficiaries are exempt from paying tax in the foundation’s jurisdiction.
Application of Foreign Law to a Cook Islands Foundation
- The Foundations Act 2012 specifically provides that foreign laws (ie laws other than those of the Cook Islands) shall not apply to invalidate the establishment of the CIF or any dedication of assets to the CIF.
- In addition forced Heirship laws of another jurisdiction cannot be enforced.
- Foreign law will not apply notwithstanding that a dedication of assets to a CIF has the effect of avoiding, defeating (or potentially avoiding or defeating) a right, claim interest, obligation or liability conferred by that foreign law.
Cook Islands Foundation – Wealth Preservation Advantages
Certainty as to the time limitation periods in which creditors must commence actions in relation to “fraudulent transfers” against Founders of CIFs. In summary, a creditor must commence an action against a Founder within 12 months of the date of transfer of assets to the CIF and against the CIF itself within 24 months of the date of transfer of assets to the CIF, in order to have legal standing to argue a fraudulent transfer by the Founder.
The creditor bears the onus of proof to show that a transfer by a Founder was done with intent to defraud that creditor. The creditor must satisfy this onus of proof to a standard of “beyond reasonable doubt”.
A CIF will continue to exist notwithstanding that the Founder of the trust may be declared bankrupt.
In the event that a creditor is successful in arguing that a transfer to a CIF was done with intent to defraud creditors, the only remedy available to the creditor is an award of damages from the assets of the CIF.
Punitive damages cannot be recovered from a CIF.
The avoidance of forced heirship rights in the home jurisdiction of the Founder will not render a CIF void or voidable.
Special purpose domestic or offshore entities can be placed underneath the CIF and take advantage of the wealth preservation features offered by Foundations Act 2012.
A foundation is formed by a person known as the founder (who may be either an individual or corporate body) who provides (through an “endowment”) the assets to be administered by the foundation. The foundation’s assets are to be administered through contractual, rather than proprietary, principles.
Unlike a trust, a foundation is a separate legal entity. It is managed by a council of members. A foundation can hold assets, enter into agreements with third parties and can sue or be sued in its own name. On the face of it a foundation is similar to a corporation. However, unlike a corporation, a foundation does not have any shareholders. A foundation can have beneficiaries, similar to a trust, or it can have purely charitable purposes. Contrary to trust beneficiaries, who have equitable rights, the beneficiaries of a foundation have contractual rights in relation to the assets of the foundation.
A founder may retain some control over the foundation’s assets through reserving certain powers under its rules. Powers that are commonly reserved include powers relating to the investment strategy of the foundation and the appointment or removal of beneficiaries. The founder may also be given the power to revoke the foundation.
Registration and Rules
The Act provides a registration regime for foundations in the Cook Islands. Each foundation shall have a foundation instrument which contains its basic details including name, objects, and the registered agent in the Cook Islands. The foundation instrument is filed with the Registrar.
A foundation must also have rules that comply with the Act. Under the Cook Islands Act, while there are certain matters that must be addressed in the rules, there is significant flexibility in how the rules in general are drafted. This allows client founders and their advisors to set out clearly how they want the foundation to operate, and how they want it to benefit the beneficiaries. The rules of the foundation are not required to be filed with the Registrar, but only held by the registered agent in the Cook Islands.
The rules of the foundation provide the substantive details of how the foundation will operate. The rules will include procedures as to the establishment of the council, the appointment of registered agent, the functions of any enforcer, and the rules as to endowment of further assets. The rules may also deal with how powers can be exercised by the council, and the distribution of assets of the foundation should it be wound up and dissolved.
Asset protection provisions
Many of the specialist and proven asset protection provisions contained in the Cook Islands International Trusts Act have also been brought into the Foundations Act, and apply to a registered Foundation and its founder.
The Act states that only Cook Islands law applies to any questions as to a foundation or the transfer of assets to a foundation. This is furthered by the exclusion of foreign law and the non-recognition of foreign judgments in relation to Cook Islands foundations. Therefore, as with Cook Islands International Trusts, a creditor of a founder is forced to commence proceedings against the founder and foundation in the Cook Islands High Court.
The Act then provides for a number of barriers to any such creditor bringing proceedings in the Cook Islands High Court. These include the all-important time limits. In particular the strict 2 year time limit for bringing an action against a foundation, as well as the deemed time limits where property is transferred to a foundation before a cause of action has accrued, or where property is transferred to a foundation more than 2 years after a cause of action has accrued.
Other important asset protection provisions for foundations include the standard of proof beyond reasonable doubt, the exclusion of punitive damages, and the requirement that all remedies against a founder, and all rights of appeal, have been exhausted.
Migration, Dissolution and Termination
An overseas foundation can be moved to and registered in the Cook Islands. This allows existing foundations to take advantage of the flexibility and protections contained in the Cook Islands Foundations Act. The equivalent of the Registrar in the overseas jurisdiction in which the foundation is established must provide written confirmation that the foundation is able, under the law of that jurisdiction, to be registered as a Cook Islands foundation. The overseas foundation must also comply with the requirements of its home jurisdiction to be registered. Upon registration in the Cook Islands, the overseas foundation is to be treated as a Cook Islands foundation. Furthermore, such registration does not in any way affect the identity or continuity of the foundation’s personality.
Conversely, the Act provides that a foundation cannot transfer its registration to another jurisdiction unless allowed under the foundation’s instrument and rules. A foundation also cannot transfer if it is bankrupt, a receiver or administrator is appointed, or proceedings have been commenced relating to the solvency of the foundation. A foundation cannot be removed from the register unless it has first notified its creditors of its intention to do so.
The Act provides for a number of situations in which a foundation is to be terminated and dissolved by its council members. The foundation rules can provide for events upon which the foundation is to terminate. A foundation may also be terminated upon bankruptcy of the foundation, the completion, failure or lapse of the foundation’s purpose, and upon the making of an order by the High Court for the winding up of the foundation. The High Court may order the winding up of the foundation upon the application of any of the foundation’s council members, founder, beneficiaries, enforcer or creditors, or upon the application of the Registrar.
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