On the Ground in the Cook Islands

The Cook Islands is an independent, English-speaking country in the South Pacific. It's in the same time zone as Hawaii and is about as far south of the Equator as Hawaii is north of it. For people who live in Australia and New Zealand, the Cooks effectively are Hawaii—a winter getaway with beaches, sun and Polynesian hospitality—but on a smaller scale. The main island of Rarotonga has just 10,000 inhabitants.

After tourism, the most important industry for the Cook Islands is trust administration. In other words, the country is a getaway location not just for tourists escaping the cold, but for wealthy people seeking shelter from lawsuit hazards, estate-tax exposure, and the variable rules in the US and Canada.

The islands were named after the British explorer and cartographer Captain James Cook, who encountered them in 1770. In 1888, they were declared a British protectorate, primarily to freeze out the French, who had occupied Tahiti, 700 hundred miles away. In 1901, they became a colony of New Zealand. Then, in 1965, the Cook Islands became an independent country in free association with New Zealand.

Today, Cook Islanders are effectively dual nationals. They are citizens of New Zealand and hold New Zealand passports; and under Cook Islands law, they also have the status of Cook Island nationals. The government is a parliamentary democracy with the Queen as the nominal head of state. In judicial process, the final court of appeal is Her Majesty's Privy Council in London. The government in Wellington handles most international relations matters for the Cook Islands, although the Cooks have direct arrangements with 30 foreign governments.

For a number of reasons, the Cook Islands might deserve a central role in for your plan for internationalization—particularly for asset protection and estate planning. Some planners rate it the world's best jurisdiction for an international trust.

It's a big plus to get a boots-on-the-ground perspective of the Cook Islands, so I'm excited to bring you my conversation with Terry Coxon, who recently made his eighth visit there. With decades of experience, Terry is an expert on using international trusts and is exceptionally qualified to give us the straight story.

Nick Giambruno: Welcome, Terry. Glad to get your report on this important topic for International Man readers.

Terry Coxon: My pleasure. I never pass up a chance to talk about international trusts. They are the most powerful, yet underused, of all the financial planning arrangements IM readers and like-minded people may hear about.

Nick: First, please explain why we should care about some tiny, faraway islands? What do the Cook Islands offer that other offshore jurisdictions don't?

Terry: When I tick off the factors that protection-minded investors are looking for, Cook Islands keeps coming up Number One. Its law for international trusts is the best, most protective in the world. Its law for limited liability companies dovetails with the trust law perfectly. It depends on the US for nothing. Costs are reasonable. And the country is socially very healthy; the Cook Islanders truly are what the Hawaiian tourist industry wants you to think Hawaiians are.

Nick: As you say, the Cook Islands have become known as one of the best asset protection jurisdictions in the world. Why is that exactly? I've heard that the country doesn't recognize the rulings of foreign courts.

Terry: That's right. If someone wanted to pursue you in a Cook Islands court, he would have to go there, start from scratch, and prove his case. He couldn't simply enforce a judgment from a court in the US or Canada.

But that's really a minor point, because if you're using the Cook Islands for asset protection, you probably won't own much of anything in your own name there. You'll use a trust to hold the assets you want to protect. In that case, what would matter is Cook Islands trust law, and for someone who wants to escape the lawsuit explosion in the US, that law is the best in the world (or, from the point of view of an attacker, the most difficult in the world).

Under the Cook Islands International Trusts Act, you can establish a trust that your future creditors can't reach, even if you've included yourself as one of the beneficiaries. And provided that funding the trust didn't leave you insolvent, no creditor can have your transfers to it set aside as a fraudulent conveyance. Anyone who might try to do so would have to prove beyond a reasonable doubt—as in a murder trial—that you had settled the trust in order to frustrate his then-existing claim against you. No jurisdiction on the planet offers anything stronger for an investor, professional, or business owner who wants to tell all potential lawsuit attackers, "You are wasting your time."

Local law also provides plain and simple protection for Cooks Islands LLCs. The law does not permit the creditor of a shareowner in a Cook Islands LLC to disturb the LLC itself in any way. The only remedy available to the creditor is a "charging order," which would direct the LLC to pay over to the creditor any amount it otherwise would pay to the shareowner. But the order wouldn't compel the LLC to make a distribution before the LLC's Manager wanted to, so getting a charging order isn't much of a prize for a shareowner's creditor. All it means is that the creditor gets to wait for the LLC to make a distribution – and in such a circumstance, he should expect to wait a very long time.

Nick: Due to its association with New Zealand, do the Cook Islands have any independence in determining whether or not to sign up for FATCA or similar measures? What are your thoughts on the Cook Islands joining FATCA, the implications for its attractiveness as an offshore jurisdiction if it does, and on financial privacy there in general?

Terry: The Cook Islands is a sovereign nation. It's not a satellite of New Zealand. And the Kiwi government has no interest in (or stomach for) strong-arming any of the island jurisdictions in its neighborhood the way the US sometimes deals with its neighbors in the Caribbean. What's more, the many Cook Islanders resident in New Zealand are voters there.

So, the Cook Islands government has a free hand to decide for itself whether to enter into any agreement with the US regarding FATCA, and it has declined to do so. The financial institutions there are a different matter. Because FATCA has no implications for asset protection, the trust companies (like virtually all trust companies in offshore jurisdictions) are signing on. They may complain about needing to, but they shouldn't, since FATCA increases the long-term advantage of using an international trust to protect family wealth.

FATCA is part of the US government's War on Privacy. Compliance with the measure demands full information about US taxpayers—and no information about foreigners. Now consider what happens after the lifetime of any American who protected his assets with an international trust: The trust completely disconnects from the US tax system. It becomes a foreigner and, so, is no longer covered by FATCA. It lawfully can be silent and invisible. It can have the privacy that is forbidden to you and your survivors personally.

FATCA has important implications for any American who wants to take the risk (he might win an orange jumpsuit) of not reporting his income from foreign investments, but it does nothing to undermine the asset-protection power of an international trust.

Nick: We've seen New Zealand cooperate with the US government in the past, especially in connection with NSA intelligence gathering. Why couldn't the US prevail upon New Zealand to press the Cook Islands to close financial accounts and disclose personal information?

Terry: That one is not on my list of things to worry about, for the following reasons:

  1. The Cook Islands is an independent country, recognized as such by the US and by New Zealand. New Zealand, for reasons of its own, has taken on the role of a protective big brother for the Cook Islands and is not going to cooperate with any effort to undermine its self-sufficiency.
  1. The Cook Islands is not a banking center. There is no body of financial accounts there that the US government might become interested in.
  1. The US government no longer needs to press the government of any foreign country to learn about your financial life. They have easier ways to get the information.

It is foolish for anyone in the US to base any plan on the assumption that the US government won't find out. The prudent assumption is that sooner or later all the details of your financial life will come to rest in a government computer—if they haven't done so already. If your plan somehow adds to your privacy, that's to the good. But if your plan depends on privacy, you should get a new plan.

When the US government wants to know something about your finances, they don't need to squeeze any financial institution in the Cook Islands or anywhere else. It's much easier for them to make up an answer and send you the giant tax bill it implies. Then it will be up to you to present information disputing the bill, with criminal penalties for straying from the truth.

If you are serious about protecting your wealth, forget about secrecy, and use a Cook Islands trust with the understanding that it is designed to work in the light of day. If the trust is competently administered, you can post a copy of it on Facebook, and the assets will still be safe.

Nick: How does one even get to the Cook Islands? Is it necessary to actually travel there to take advantage of its internationalization options?

Terry: It is surprisingly easy to get there from the US, especially if you're on the West Coast. Air New Zealand operates a 10-hour, non-stop flight from Los Angeles directly to the main island of Rarotonga. It leaves LAX late on Sunday night. The return flight leaves Rarotonga late the following Saturday night. So, plan to spend a week… unless you want to continue on to Australia or New Zealand.

Of course, if you don't like to travel, Federal Express can do the traveling for you.

Nick: Is the nation's economic stability completely dependent upon New Zealand? What are your thoughts on the local economy, the nation's fiscal situation, and the stability of the financial system?

Terry: Cook Islanders use New Zealand currency. The economy depends very much on tourism from Australia and New Zealand. Hard times in either country would hurt the Cook Islands economy. That's one of the reasons the government is earnest in supporting the trust industry, to improve the economy's diversity.

Nick: Any comments on the nation's banks?

Terry: Cook Islands is an important center for trusts and for company formation, but it is not an international banking center. Banking choices are limited. Trusts and LLCs hold most of their assets through banks and brokers in other jurisdictions.

The Rarotonga office of ANZ bank (a large Australian bank) is close to brain dead and in any case no longer accepts US depositors.

Nick: What do the Cook Islands offer for people looking to make a lifestyle real estate investment? Is living there a realistic option for someone looking to get off the grid? Tell us a little about the islands' infrastructure and the culture of the people who live there.

Terry: The country is like a small town. On Rarotonga, there are two supermarkets and an assortment of small retail outlets. There is one television channel, unless you subscribe to the premium service, which would get you five.

Public transit consists of two buses that operate 16 hours per day on the road that circles the island. One is marked "Clockwise" and leaves the downtown stop on the hour. The other is the "Anti-clockwise" bus, which leaves downtown on the half-hour. They pass each other once an hour somewhere between the Rarotongan (a nice resort with a nice beach) and Pacific Resort (an even nicer resort, with a lovelier beach than most people will ever enjoy).

The people are outstandingly courteous and friendly, as you might expect in a small town, where everyone knows everyone. It would be impossible for an anti-social personality to operate unnoticed. The edginess that marks much of the modern world hasn't taken hold in the Cook Islands; if you see someone with ostentatiously weird hair, it's probable a German tourist.

I've seen no poverty pockets or dangerous-looking neighborhoods. I haven't passed anyone in public who looks as though he's trying to make a career of being mad at the world. There is no welfare class or underclass. People work, most in small businesses or operating small farms. There is none of the unhealthy social residue that you might notice in the Caribbean countries that are now tax havens but which used to be slave colonies.

The Cook Islands is an enjoyable place to spend time if you like hiking, catching or eating fish, swimming in sheltered lagoons, snorkeling, kayaking, drinking New Zealand wine, resting or reading on the beach (shore-side trees are abundant), or lazy relaxation in a welcoming, low-pressure environment. But only Cook Islanders can own real property (although anyone may lease a property for up to 60 years.

Nick: What about gold? Is it easy to buy/sell/store gold there, as well as taking it in and out of the islands?

Terry: Any gold you find for sale will be part of a ring or necklace with black pearls, which are the country's number-three industry. There is no investment market for gold. If you want your Cook Islands trust to own precious metals, it can do so through an account in Switzerland, Singapore, Australia, or almost anywhere you like.

Nick: Who sets that up? Who makes the connection between the trust and the gold depository?

Terry: The trustee you've hired can do it for you, if that's what you want. But in most cases, the bulk of what a trust owns consists of a Cook Islands LLC that the investor manages. The investor, as Manager, opens bank, brokerage and custodial accounts for the LLC wherever he thinks fit. That gives the investor hands-on control of management decisions without having legal ownership. And it gives the investor the comfort of knowing where every penny is. Of course, the LLC's structure should include a mechanism whereby the investor could step aside as Manager if he ever comes under duress.

Nick Giambruno

Nick is Doug Casey’s globetrotting companion and is the Senior Editor of Casey Research’s International Man. He writes about economics, offshore banking, second passports, value investing in crisis markets, geopolitics, and surviving a financial collapse, among other topics. He is a CFA charterholder. In short, Nick’s work helps people make the most of their personal freedom and financial opportunity around the world. To get his free video crash course, click here.

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