Why Real Estate Investors Set Up Cook Islands Trusts?
Real estate investors carry substantial liability. Tenants slip and fall, contractors get injured on the job sites, properties have environmental issues, and development projects can go bankrupt leading to litigation. A single incident on one property can threaten the entire portfolio.
Most real estate investors rely on limited liability companies (LLCs) to separate property liability. This is a good start, but LLCs alone are not airtight protection, and they do nothing to shield the liquid wealth that real estate investors accumulate over years of successful investing.
REAL ESTATE INVESTOR LIABILITIES
The most common real estate liabilities that generally attach to real estate investors are liabilities from construction and contractor claims, environmental liability, partner disputes, and a lot of tenant claims.
The standard approach taken by real estate investors is to place a property in an LLC to avoid a judgment from one property attaching to other properties. This is sound practice and is the right foundation for any real estate investor.
The problem is that the LLC only protects the real property from being attached. It does not protect the following:
- The equity accumulated in the LLCs;
- Your liquid investments outside the real estate holdings;
- Cash distributions you have already received and accumulated personally; and
- Other personal assets unrelated to the real estate.
A Cook Islands trust adds a layer above the LLC structure, protecting the wealth that flows out of the real estate operation and accumulated as liquid personal assets.
BEST STRUCTURE FOR REAL ESTATE INVESTORS
The most effective structure for real estate investors is a combination of both domestic and offshore planning. Here are the steps to consider:
- Each property should be held in a separate LLC.
- A holding company should be formed in a business-friendly state to own the membership interest of all the individual LLCs.
- Create a Cook Islands trust that owns the holding company. The trustee will hold the ownership interest, placing your entire ownership behind strict Cook Islands law.
Under this type of planning, if a real estate investor received a judgment, the creditor would have to first penetrate the LLC holding the property. Then reach through the holding company, and then reach the Cook Islands trust, which requires litigation in the Cook Islands, under Cook Islands law, with a beyond a reasonable doubt burden of proof. This combined structure makes it very difficult, and time consuming, for judgments to attach in addition to deterring frivolous lawsuits.
TIMING
Like all asset protection strategies, a Cook Islands trust is most effective when it is in place before a specific creditor threat materializes. A real estate investor who funds the trust during a successful stretch, before a problem occurs, is in a much stronger position than one who transfers assets after a specific incident has occurred. The 2-year Cook Islands stature of limitations on fraudulent transfer claims run from the date of transfer. Transfers made 3 years ago, before any specific claim existed, are in the strongest possible position.
The time is now!
If you need help determining the best asset protection strategies, we can help. Timing is NOW. Schedule your consultation. Becoming a business owner, you control your own destiny, choose the people you work with, reap big rewards, challenge yourself, give back to the community, and you get to follow your passion. Knowing what you’re getting into is smart business because the responsibility of protecting your business falls on you.
