Setting Up a Cook Islands Trust While in a Lawsuit

Can You Set Up a Cook Islands Trust While in a Lawsuit?

There is no law that outright forbids creating a Cook Islands trust while a lawsuit is pending. In other words, an individual can legally form a Cook Islands trust even after being sued.

However, the timing implicates fraudulent transfer law.

A fraudulent transfer (also called fraudulent conveyance) occurs when a person transfers assets to intentionally hinder, delay, or avoid active or anticipated creditor claims.

If you move assets into a trust after a lawsuit has been filed, U.S. courts will likely view it as an attempt to place those assets beyond the creditor’s reach. Unlike criminal fraud, fraudulent conveyance is a civil matter. If you are found to have made such an improper transfer, you would face civil liability and remedies rather than criminal charges.

U.S. courts have the authority to undo transfers made after a creditor’s claim arises. Funding a Cook Islands trust after a legal threat has emerged is a classic red flag.

For example, U.S. courts can reverse a transfer into a trust if it was made after a lawsuit or debt was known, under statutes like the UFTA, and bankruptcy trustees can claw back such transfers (even up to 10 years in some bankruptcy cases).

In practice, this means that setting up a Cook Islands trust during litigation could be deemed a fraudulent conveyance and unwound by a court order.

Courts may infer intent to hinder the creditor, especially if you remain the beneficiary or retain some control over the trust.

Fraudulent conveyance, by itself, is not a criminal offense. If a court finds the transfer was fraudulent, you would face civil remedies rather than criminal fraud charges.

Failure to obey court orders (like orders to return assets) can lead to contempt of court, which may involve fines or imprisonment.

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Fraudulent Transfer Concerns in the Cook Islands

One reason people consider a Cook Islands trust even after litigation has started is the protective legal framework of that jurisdiction. Cook Islands law makes it significantly more difficult for a creditor to prove that a transfer was fraudulent and to reach the assets.

The Cook Islands’ International Trusts Act imposes a very high standard of proof on any creditor claiming a fraudulent transfer. The creditor must prove the settlor’s intent to defraud beyond a reasonable doubt, which is a criminal-law level of certainty.

This evidentiary burden makes Cook Islands trusts relatively safe from being unwound by foreign creditors, at least in a Cook Islands court.

In addition, Cook Islands law has a short statute of limitations for fraudulent transfer claims: a creditor must sue in the Cook Islands courts within either one year of the asset transfer or at most two years from when the creditor’s cause of action accrued.

After that brief window, any claim to unwind the transfer is time-barred. These laws mean that even if the timing of your trust looks suspicious, a plaintiff has only a narrow opportunity to challenge it in the Cook Islands, and they face an uphill battle to prove you acted with intent to defraud.

Because of these legal protections, a Cook Islands trust funded during a lawsuit can still shield assets effectively within the Cook Islands legal system.

However, U.S. courts do not directly apply Cook Islands law. From the U.S. court’s perspective, the transfer might still be deemed fraudulent. The U.S. court can declare the transfer void as to that creditor and order you to turn over the assets.

The Cook Islands will not automatically honor a U.S. judgment voiding the transfer. The creditor would need to go to a Cook Islands court and start a new case to enforce their judgment or challenge the transfer.

Cook Islands courts require re-litigation of the entire claim and do not recognize foreign court orders. A creditor must hire local Cook Islands counsel, post a substantial cash bond before filing suit, and cannot use contingency fee arrangements (meaning they must pay all legal fees upfront).

This is expensive and discouraging for the creditor, precisely the point of such trusts. If the creditor does file in time, they still face the high beyond-reasonable-doubt proof standard and other hurdles like no pre-judgment asset freezing orders.

In short, while U.S. law generally disfavors post-lawsuit transfers, the Cook Islands legal system is designed to protect such transfers, making it extremely difficult for creditors to recover assets through Cook Islands courts.

As a result, challenges in the Cook Islands are extremely rare. More often, the real battle plays out in U.S. courts via contempt proceedings rather than in Cook Islands courts.

Repatriation Orders and Contempt of Court

Even though a Cook Islands trust is beyond the direct jurisdiction of U.S. courts, a U.S. court can exert pressure on the person who set up the trust.

If a court awards a judgment to a creditor, the judge may order the judgment debtor to bring the offshore assets back to the U.S. or otherwise make them available to satisfy the judgment. The logic is that, as the trust settlor or beneficiary, you might have some ability to request distributions or control the assets.

The U.S. court may not be deterred by the existence of the foreign trust instrument. In some cases, courts have ordered debtors to repatriate funds from offshore trusts without regard to any documents or legal structures that were put in place to protect those assets. In other words, a judge can tell you to retrieve the money notwithstanding the trust.

If you refuse to comply with a repatriation order, U.S. courts can employ their contempt powers. Contempt of court is a severe consequence for disobeying a court order. A court can impose coercive sanctions such as fines or even indefinite jail time until you either comply or convince the court that compliance is impossible.

For example, if a judge orders you to direct your Cook Islands trustee to return assets and you do not (or claim you cannot), you may be found in contempt and jailed. This has happened in numerous cases: judges have jailed defendants who said they couldn’t repatriate funds from an offshore trust, on the reasoning that the inability was self-created.

In one notable case, a couple who had transferred millions to a Cook Islands trust were held in contempt and incarcerated when they failed to bring the money back. Similarly, in an SEC enforcement case, a defendant was jailed for contempt after claiming he had no control over assets held in an offshore trust.

These contempt powers are civil (not criminal) in nature, meant to coerce compliance. The court’s goal is to force you to do whatever is necessary to turn over the assets. From the court’s perspective, it doesn’t matter that the trust is in the Cook Islands. Instead, what matters is that you set it up or benefit from it.

If you deliberately put your assets out of reach and then say “I can’t retrieve them,” many judges will respond that you created the impossibility yourself.

In some circumstances, U.S. courts have held that a self-created impossibility is not an acceptable defense for failing to comply with a court order. This means that telling the judge, “I’m sorry, my offshore trustee won’t obey me,” is usually not a winning argument if you were the one who chose to move assets offshore during litigation.

However, getting to this point in litigation is financially taxing for the creditor and can take a long time. It is also not guaranteed that the court would side with the creditor on this issue. In the meantime, the assets would be safe from collection. The existence of the offshore trust can be used as leverage in settlement negotiations.

From a creditor’s point of view, collecting assets that have been moved into a Cook Islands trust is an uphill battle, even if they obtain a judgment in the U.S. and even if the trust was funded after the lawsuit began. This is precisely why such trusts are popular for asset protection.

About the Author

Gideon Alper is a nationally recognized expert in asset protection planning. He has been quoted by major media publications as a leading authority in Florida asset protection and offshore trust formation. Gideon graduated with honors from Emory University Law School and has been practicing law for over 15 years.

Gideon and the Alper Law firm have advised thousands of clients about how to protect their assets from creditors.