¶ 2901
Overview
Scope. This chapter examines how the federal tax law of the United States treats Cook Islands international trusts, Cook Islands limited liability companies and Cook Islands foundations that have an American settlor, member, founder or beneficiary. It covers the classification of each vehicle, the income tax rules that decide who is taxed on its income, the information returns that its American participants and fiduciaries must file, the penalties for failing to file them, and the gift, estate and expatriation taxes that a Cook Islands structure can attract. The chapter explains the law. It does not prescribe how a return is to be prepared, and the forms and their instructions change from year to year.
Why the chapter matters to Cook Islands planning. The international statutes of the Cook Islands keep the Income Tax Act 1997 and the Value Added Tax Act 1997 away from an international trust, a limited liability company and a foundation, so that none of them pays Cook Islands tax on its foreign income (see supra ¶¶ 2620, 2630, 2650). For an American client that absence of local tax changes nothing in the United States. The client is taxed on worldwide income, and the federal rules for foreign trusts, foreign entities and foreign accounts apply in full. Those rules were written on the assumption that foreign structures are used to defer or conceal income. Their information returns carry penalties measured in percentages of the assets or amounts involved, they are assessed without a notice of deficiency, and a foreign secrecy law is no excuse for failing to file. A structure that is sound under Cook Islands law can generate penalties larger than any judgment it was designed to resist.
The three questions. Every Cook Islands vehicle with an American connection raises three questions, and the answer to each depends on the one before it. The first is classification: is the vehicle a trust, and if so a domestic or a foreign trust; or is it a business entity, and if so a corporation, a partnership or a disregarded entity? The second is income tax: who is treated as owning the income, the settlor, the beneficiaries or the vehicle itself? The third is reporting: which information returns must be filed, by whom and when? Paragraphs 2910 to 2930 address trusts, ¶ 2950 limited liability companies and ¶ 2960 foundations. Paragraphs 2940 and 2970 set out the principal reporting regimes. Paragraph 2980 turns to the transfer taxes and expatriation, and ¶ 2990 to penalties, the limitations period and remediation.
The typical structures. Three Cook Islands structures recur in American practice. The first is a self-settled international trust for an American settlor, with a licensed Cook Islands trustee company as trustee, often holding its investments through a Cook Islands LLC whose sole member is the trustee (see supra ¶¶ 1710, 1740.05). The second is an international trust settled by a parent who lives outside the United States for a family that includes American children or grandchildren. The third is a Cook Islands foundation used in place of a trust, either by an American founder or by a foreign founder whose beneficiaries include Americans. Each produces a different combination of income tax and reporting results, and the chapter returns to them in Examples throughout.
Sources and currency. The statutory text is taken from the Internal Revenue Code, title 26 of the United States Code, cited as "I.R.C.", and from the Bank Secrecy Act in title 31. Regulations are cited to the Code of Federal Regulations as currently published. Form instructions are cited by their revision date; the December 2025 revisions of the instructions for Forms 3520 and 3520-A were current when the chapter was written. The fuller treatment of the reporting regime, on which this chapter draws, is in Lighthouse on Asset Protection, chapters 42, 43 and 50, and the classification of limited liability companies is examined in Lighthouse on Limited Liability Companies, chapter 39. No United States ruling or decision deciding the federal tax classification of a Cook Islands trust, LLC or foundation as such was located. The rules discussed apply to Cook Islands vehicles in the same way they apply to vehicles formed in any other foreign jurisdiction, and the chapter follows the parallel chapter of Lighthouse on Nevis: Trusts, LLCs, and Multiform Foundations, chapter 29, wherever the federal analysis is the same.
Persons who are "United States persons." The Code defines a United States person to include a citizen or resident of the United States, a domestic partnership, a domestic corporation, any estate other than a foreign estate, and a domestic trust. I.R.C. § 7701(a)(30). A green-card holder is a resident for income tax purposes, and so is an individual who meets the substantial presence test, even if the individual's home is elsewhere. Many of the rules in this chapter turn on whether a settlor, beneficiary, protector, founder, council member or trustee is a United States person, and the answer can change from year to year as people move. A Cook Islands structure for a mobile family should be reviewed whenever a participant becomes or ceases to be a United States person.
Two residence tests that must not be confused. The International Trusts Act 1984 defines an international trust by reference to residence in the Cook Islands: at least one trustee must be a trustee company or a registered international or foreign company, and the beneficiaries must be "at all times non-resident" in the Cook Islands (see supra ¶ 570). The Act imposes no residence requirement on the settlor. Residence in the Cook Islands has no bearing on the federal questions examined here. An American citizen living in Rarotonga is a United States person, and a trust that is an international trust under Cook Islands law may be a grantor trust, a nongrantor trust or, in rare cases, a domestic trust for federal purposes. The Cook Islands test decides whether the trust has the protection of the Act. The federal tests decide how the trust and its participants are taxed.