This South pacific island country offers convenient, flexible and easy-to-administer options for setting up private trust companies
When establishing a trust for wealth planning, succession, philanthrophropy or any of the many other reasons trusts are established, choosing a trustee is the first and most important decision a settlor will need to make. As creating a trust requires legal ownership of the settlor’s assets to be transferred to the trustee, the settlor will need to have the utmost confidence in the trustee’s experience, substance, integrity and professionalism.
There are a number of options available to a settlor when choosing a trustee. Professional corporate trustees in foreign jurisdictions are commonly used, where the trustee is licensed and either institutional or independent. However, due to the settlor’s understandable reluctance in handing over ownership and control of his/her assets to people he/she doesn’t know, and who are based in a country he/she has never visited, another trustee option is becoming increasingly popular.
Private trust companies (PTCs) are established with the sole purpose of acting as a corporate trustee to one or more family, or otherwise related, trusts.
Advantages of PTCs
Using a PTC can provide a settlor with numerous benefits and advantages, including:
Peace of mind. The settlor may find greater comfort having the trust assets owned and administered by a PTC that he/she has created;
Control. A PTC allows the settlor, or those he/she nominates, to retain a high degree of control over the administration of trust assets, including investment and distribution decisions. This can be achieved by the settlor and his/her family members and advisers becoming directors of the PTC;
Confidentiality. A PTC enables better control over information confidential to the settlor and his/her family;
Diversification. A PTC will provide the settlor greater opportunity to invest in and hold assets of his/her choice. A trustee has a duty to preserve and diversify trust assets in the best interests of all beneficiaries. A professional corporate trustee may therefore be averse to holding high-risk assets, or a high percentage of the same assets, to avoid breaching its duty;
Expense. A PTC allows the settlor to avoid trustee fees and other professional costs, which for larger trust funds are often charged on an ad valorem basis.
Ownership and management of PTC
The ownership and management of the PTC are vital to its effectiveness and the efficient operation of the overall structure. The settlor’s circumstances, and what is best for him/her and his/her family, will ultimately determine ownership and management decisions.
Directors. In determining the composition of the PTC board, the settlor must understand that he/she having total control over trust assets may compromise the validity of the structure as well as its tax effectiveness. In addition, it must be remembered that the PTC is a trustee and owes legal duties to the trust’s beneficiaries. The settlor and family members will not (as a professional corporate trustee would) be familiar with the role of the trustee or what is required to discharge those duties. Failure to discharge those duties may lead to personal liability for the directors.
Where the settlor retains too much control over trust assets through the use of the PTC, the structure runs the risk of being considered a sham. Similarly, it may lose tax effectiveness if all substantial decisions are seen to be made in the settlor’s home jurisdiction.
To avoid such scenarios, it is advisable that directors of a PTC be a combination of family members and professional advisers, including a professional corporate trustee.
It is most unlikely that the settlor and his/her family members would have experience in administering a trust and its assets. It is therefore advisable that the PTC board engages a professional corporate trustee to provide administration services to the PTC to ensure it meets statutory, regulatory and compliance obligations, and properly documents trust activity such as investments, distributions, financial transactions and asset transfers.
Owners. There are a number of options a settlor might consider when deciding on the ownership of the PTC. The most favourable is for the PTC to be ownerless, as this will distance the settlor from ownership reducing the potential for:
(i) the structure to be compromised through the settlor not having divested ownership of trust assets sufficiently; and (ii) the trust being taxable in the hands of the settlor.
Two vehicles commonly used to create an ownerless PTC are: a purpose trust and a foundation.
A purpose trust is a trust established for a particular purpose, as opposed to being for the benefit of named beneficiaries. In the PTC scenario, the trust’s sole purpose would be to hold shares in the PTC. A foundation is created by a founder and managed by a foundation council, similar to a board of directors.
Although it is an incorporated entity, the foundation has no shareholders or beneficiaries with proprietary interests. A foundation is established to carry out certain activities or achieve certain objectives. In the PTC scenario, that objective would be to hold shares in the PTC.
Should the settlor wish to hold shares in the PTC directly, he/she should be mindful that in addition to this potentially compromising the overall structure and its tax effectiveness, as mentioned above, in the event of the settlor’s death the PTC shares will form part of his/her estate and may result in the ownership and control of the PTC, and the succession of the trust assets, being different to what he/she had intended.
The Cook Islands PTC solution
Cook Islands law requires that companies carrying on trustee company business be licensed to do so (section 12(3)(a) of the Trustee Companies Act, 2014 [TCA]). However, where such a company is a Cook Islands international company (IC) – incorporated under the International Companies Act, 1981-82 (ICA) – and it is to act as trustee of no more than three Cook Islands international trusts (ITs) – established under the International Trusts Act, 1984 (ITA) – the company is deemed not to be carrying on trustee company business, and licensing is not required (TCA section 5(3)(b)). The use of an IC as trustee of an IT meets the ITA requirement that one of the IT’s trustees be a Cook Islands licensed trustee company (LTC), a registered foreign company or an IC.
The Cook Islands therefore provides settlors a convenient, flexible and easy to administer PTC option through the use of an IC.
ICs must be incorporated through an LTC, which will provide a registered office and company secretary as required by the ICA. The directors of the IC do not need to be resident, therefore allowing the settlor to determine the composition of the PTC board.
The Cook Islands has a number of LTCs experienced in the establishment and administration of ICs and ITs, and is therefore able to assist the PTC in meeting its statutory and regulatory obligations, as well as other trust activity as the PTC board directs.
When structuring the ownership of the PTC, the Cook Islands can provide an ownerless vehicle to hold the shares of the PTC through either a purpose trust or a foundation. Cook Islands law provides for non-charitable purpose trusts where the specified purpose will be to hold the shares of the PTC. Similarly, a foundation could be established pursuant to the Foundations Act 2012 for the purpose of holding the shares. The LTC will be able to provide a trustee to the purpose trust and a member to the foundation’s council and administration services to both.
In the event the settlor wishes to hold the PTC shares directly, despite the above-mentioned potential pitfalls, the Cook Islands can provide a solution to assist the settlor’s succession planning and avoid the PTC shares falling into his/her estate upon death.
Section 228B of the ICA allows the settlor to specify in the PTC’s articles of association a person or persons to whom he/she wishes the shares to be automatically transferred to upon his/her death, therefore avoiding the probate process.
Through a carefully structured and professionally administered PTC, a settlor and his/her family are able to actively participate in decisions concerning the trust and its assets. The integrity of the structure can be retained, the settlor’s succession and tax planning objectives achieved, and legal duties to beneficiaries discharged.
The Cook Islands PTC solution currently involves the use of an IC as a PTC, an LTC to provide administration services to the PTC, and an ownership structure. However, a proposed amendment to the TCA currently being discussed is for Cook Islands foundations and limited liability companies also to be able to act as a PTC of no more than three ITs. This could provide some interesting planning opportunities, especially around the ownership of the PTC.
COOK ISLANDS FINANCE
PO Box 3255, Clarkes Building,
Tel: +682 21175