Cook Islands registration

Background

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

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

Migration, dissolution and termination

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.

Conclusion

As clients and planners look to flexibility in wealth planning vehicles, the foundation provides an alternative to the more traditional trust. In developing its foundations legislation the Cook Islands has taken the opportunity to learn from other jurisdictions to bring in the most advantageous provisions combined with its existing expertise in the area of asset protection.