Cook Islands trusts and U.S. reporting rules

Trustee business legislation and licensing

Trustee company business in the Cook Islands falls within the Trustee Companies Act 2014. The Act applies to any person carrying on trustee company business in the Cook Islands, and the Financial Supervisory Commission supervises that business.^[2]

The Commission publishes a list identifying licensed trustee companies. Its licensing instructions direct applications to the Commission under the Act and refer applicants to prescribed forms.^[2]

Financial account reporting and information exchange

The Revenue Management Division runs a Common Reporting Standard system through which financial institutions register and submit reports. It provides a CRS portal for those submissions under the OECD automatic exchange of information program.^[3]

CRS reports contain financial account information that is exchanged with tax authorities outside the Cook Islands.

The Cook Islands is a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes.^[3]

Treasury describes FATCA as requiring foreign financial institutions to report information about accounts held by U.S. taxpayers. FATCA reporting also covers accounts held by foreign entities in which U.S. taxpayers have a substantial ownership interest.^[5]

Financial institutions may register directly with the IRS or comply with intergovernmental agreements treated as effective in their jurisdiction. The applicable agreement depends on the jurisdiction concerned.^[5]

U.S. trust classifications and tax treatment

U.S. citizens fall within the IRS definition of a U.S. person. The IRS explains that creating a foreign trust or having transactions with one can produce both income tax consequences and information reporting obligations.^[7]

The Form 3520 instructions define domestic status through two conditions. A U.S. court must be able to exercise primary supervision over trust administration, and one or more U.S. persons have to control all substantial trust decisions.^[8]

Under those instructions, a trust outside the domestic definition is foreign. The grantor trust classification applies to the extent that someone other than the trust is treated as owning its assets, and that treatment can cover only part of the assets.^[8]

A nongrantor trust is treated as a taxable entity under the instructions. A trust can have nongrantor treatment for only a portion of its assets.^[8]

A U.S. person treated as a foreign trust's owner under the grantor trust rules is generally taxed on its income. The IRS describes section 679 as treating a U.S. asset transferor as an owner when the foreign trust has, or is presumed to have, a U.S. beneficiary.^[7]

A U.S. beneficiary receiving a distribution from a foreign nongrantor trust generally reports the beneficiary's share of distributable net income. The IRS also identifies gain recognition under section 684 for certain transfers of appreciated assets by a U.S. person to a foreign nongrantor trust.^[7]

Beneficiary statements provide information about the tax treatment of distributions. The IRS identifies different statements for beneficiaries of grantor and nongrantor trusts, and refers to Form 3520 instructions for reporting when no statement is received.^[7]

U.S. foreign trust reporting regimes

The IRS identifies Forms 3520 and 3520-A, Form 8938, and FBAR as reporting regimes that can apply to U.S. persons connected with foreign trusts. Its overview covers transactions, ownership under the grantor trust rules, and receipt of distributions.^[7]

Form 3520 transactions and ownership

Form 3520 generally applies when a U.S. person creates a foreign trust, transfers money or property to it, or lends to it. The IRS also lists trust distributions, uncompensated use of trust property, and loans received from a foreign trust among the filing triggers.^[7]

Ownership reporting can apply without a transaction. The instructions require Part II from a U.S. person treated as owning foreign trust assets under sections 671 through 679, including a period in which the trust has had no transactions.^[8]

The distribution definition extends to direct and indirect gratuitous transfers of money or property. It applies without requiring the recipient to be named as a beneficiary in the trust terms.^[8]

The instructions also describe constructive distributions. Examples include payments of a person's credit card charges by a foreign trust and checks drawn by that person on the trust's bank account.^[8]

Part III reporting includes distributions whether or not they are taxable. The instructions assign loans and uncompensated property use to line 25, while line 24 addresses other cash and property received directly, indirectly, actually, or constructively.^[8]

Joint Form 3520 filing is permitted for spouses filing a joint income tax return when both are transferors, grantors, or beneficiaries of the same foreign trust.^[8]

Form 3520-A and owner statements

The IRS places responsibility on U.S. owners under the grantor trust rules to ensure that the foreign trust files a complete and accurate Form 3520-A on time. That responsibility includes annual statements for U.S. owners and U.S. beneficiaries.^[7]

If the trust does not file Form 3520-A, the U.S. owner is required to complete a substitute and attach it to a timely filed Form 3520. The instructions require the substitute package to include the owner and beneficiary statements, with copies provided to the U.S. owners and beneficiaries.^[7][8]

Form 3520-A uses the foreign trust's employer identification number. The IRS filing guidance specifies that identifier in place of the U.S. owner's Social Security number or individual taxpayer identification number.^[7]

Form 8938 and FBAR

Form 8938 can apply when the total value of specified foreign financial assets in which a person has an interest exceeds the applicable reporting thresholds. This filing requirement is separate from foreign trust reporting and can apply alongside it.^[7]

FBAR reporting can apply to a person with a financial interest in, or signature authority over, a foreign financial account. Examples of foreign financial accounts include bank and brokerage accounts, mutual funds, and trusts, and FBAR reporting is made annually.^[7]

An exemption from foreign trust information reporting does not settle every other filing question. The Form 3520 instructions state that exemptions granted under IRS revenue procedures and proposed regulations leave other reporting obligations intact.^[8]

Court administration structure

The Ministry of Justice has a High Courts division that manages and supports courts and tribunals. The Registrar heads the division, with deputy registrars for criminal and civil administration, the Land Court, and Land Titles, together with a Stenography Services Manager.^[4]

Eleven deputy registrars from the Pa Enua also report to the Registrar. The division's administrative responsibilities include managing the land and tribal title registries.^[4]

International trusts and U.S. tax

International trusts

A Cook Islands international trust has three defining requirements: registration in the Cook Islands, at least one qualifying trustee, and beneficiaries who are not resident in the Cook Islands.^[9]

A qualifying trustee can be a Cook Islands trustee company, an international company, or a registered foreign company.^[9]

For the beneficiary requirement, non-resident beneficiaries are people who are neither domiciled nor ordinarily resident in the Cook Islands.^[9]

U.S. tax characterization

A Cook Islands trust set up by a U.S. settlor is generally treated as a foreign grantor trust for U.S. tax purposes, with its income reported on the settlor's own return.^[10]

Annual information filings associated with the structure can include Form 3520, Form 3520-A, and FinCEN Form 114.^[10]

More on Cook Islands

Questions and answers

Related resources

Related glossary terms

• Foreign financial account: Form 8938 treats an account outside the United States as a specified foreign financial asset. FBAR rules identify reportable accounts by type and location.
• FATCA: FATCA requires certain U.S. taxpayers to report foreign assets and financial institutions to report accounts to the IRS. Form 8938 may apply at thresholds.
• Trustee: A trustee controls trust assets and manages, uses, or disposes of them for beneficiaries or a stated purpose under the trust terms and applicable law.

Related articles and guides

• BVI trust tax rules and U.S. reporting: The British Virgin Islands Trustee Act describes income tax treatment for trusts and beneficiaries. IRS rules address U.S. person reporting for foreign trusts.
• Bahamas Trust Tax and Reporting Rules: Bahamas trust rules on trustee duties, accounting records and certain tax matters, with the IRS reporting that applies to U.S. citizens with a foreign trust.
• Cayman information exchange and U.S. trust reporting: A reference for U.S. citizens on Cayman Islands CRS and FATCA frameworks, beneficial ownership rules, and IRS reporting forms related to foreign trusts.

Tools and official documents

• FinCEN Report 114 (FBAR): foreign account reporting: FinCEN Report 114 (FBAR) for U.S. citizens: account definitions, financial interests, signature authority, trust provisions and the filing requirements it sets.