A Trust for Magwitch

At the beginning of Great Expectations, the young Pip meets convict Abel Magwitch on the marshes and tries to help with his escape. Magwitch is caught and transported to Australia. Some years later, Mr Jaggers, a solicitor, comes to see Pip and tells him that he is to come into some property, but that he is not to know the identity of the current possessor. Pip moves to London and lives the high life, as he is transformed from a blacksmith's boy to a young gentleman. One day, he receives a visitor. It is Magwitch, returned from Australia, who reveals that he is Pip's mystery benefactor. Magwitch is eventually recaptured, during a sequence of events in which he is mortally injured. Following his death, Magwitch's property is forfeit to the Crown and with it go Pip's expectations.

Could a trusts lawyer in the modern world help Magwitch to structure his wealth more effectively? Magwitch has a number of requirements.

Anonymity

At their first meeting, Mr Jaggers tells Pip that his expectations are subject to two conditions. The first is that he shall always bear the name of Pip. He describes the second in these terms:

"Now you are to understand, secondly, Mr. Pip, that the name of the person who is your liberal benefactor remains a profound secret, until the person chooses to reveal it. I am empowered to mention that it is the intention of the person to reveal it at first hand by word of mouth to yourself. When or where that intention may be carried out, I cannot say; no one can say. It may be years hence. Now, you are distinctly to understand that you are most positively prohibited from making any inquiry on this head, or any allusion or reference, however distant, to any individual whomsoever as the individual, in all the communications you may have with me. If you have a suspicion in your own breast, keep that suspicion in your own breast. It is not the least to the purpose what the reasons of this prohibition are; they may be the strongest and gravest reasons, or they may be mere whim. This is not for you to inquire into. The condition is laid down. Your acceptance of it, and your observance of it as binding, is the only remaining condition that I am charged with, by the person from whom I take my instructions, and for whom I am not otherwise responsible. That person is the person from whom you derive your expectations, and the secret is solely held by that person and by me."

So the vehicle for Magwitch's largesse needs to prevent the beneficiary from finding out about the identity of the donor.

Asset Protection

After his abortive escape attempt, Magwitch is transported to Australia to life. His return to England involves a number of further crimes, with consequences for Pip, too:

"That he would be leniently treated, I could not hope. He who had been presented in the worst light at his trial, who had since broken prison and had been tried again, who had returned from transportation under a life sentence, and who had occasioned the death of the man who was the cause of his arrest.

...

I foresaw that, being convicted, his possessions would be forfeited to the Crown."

Earlier in the novel, Wemmick, Mr Jaggers's clerk, described his reliance on "portable property" as a means of wealth protection. Clearly, that was not enough, but Mr Jaggers, at least, has some inkling of what might have been done instead:

"Mr. Jaggers was querulous and angry with me for having “let it slip through my fingers,” and said we must memorialize by and by, and try at all events for some of it. But he did not conceal from me that, although there might be many cases in which the forfeiture would not be exacted, there were no circumstances in this case to make it one of them. I understood that very well. I was not related to the outlaw, or connected with him by any recognizable tie; he had put his hand to no writing or settlement in my favor before his apprehension, and to do so now would be idle. I had no claim, and I finally resolved, and ever afterwards abided by the resolution, that my heart should never be sickened with the hopeless task of attempting to establish one."

It is important to note at this point that Magwitch's fortune is not itself the proceeds of crime and is not liable to be forfeited on that ground. Magwitch was a transported convict, but he made his money through honest means:

"“I've been a sheep-farmer, stock-breeder, other trades besides, away in the new world,” said he; “many a thousand mile of stormy water off from this.”

“I hope you have done well?”

“I've done wonderfully well. There's others went out alonger me as has done well too, but no man has done nigh as well as me. I'm famous for it.”"

Flexibility

Magwitch holds Pip in great affection: "Look'ee here, Pip. I'm your second father. You're my son,—more to me nor any son. I've put away money, only for you to spend." However, while Magwitch might have regarded Pip as his son, Magwitch was in fact a father already. It is only at the very end of Magwitch's life that Pip is able to tell him this important fact:

"“Dear Magwitch, I must tell you now, at last. You understand what I say?”

A gentle pressure on my hand.

“You had a child once, whom you loved and lost.”

A stronger pressure on my hand.

“She lived, and found powerful friends. She is living now. She is a lady and very beautiful. And I love her!”

With a last faint effort, which would have been powerless but for my yielding to it and assisting it, he raised my hand to his lips. Then, he gently let it sink upon his breast again, with his own hands lying on it. The placid look at the white ceiling came back, and passed away, and his head dropped quietly on his breast."

By then, of course, it is too late for Magwitch to make any provision for his daughter. His property is forfeit, she is illegitimate, the Inheritance (Family Provision) Act 1938 was 100 years away (and wouldn't have helped) and the Inheritance (Provision for Family and Dependants) Act 1975 was even further away. Had he known about his daughter, Magwitch might well have wanted to see her set up as a lady, in the same way in which Pip was set up as a gentleman.

A Trust for Magwitch

Flexibility

Taking the points in reverse order, a discretionary trust with a wide beneficial class or a generous power to add new beneficiaries would answer the flexibility requirement. If the beneficial class included "children" or "issue", then a long-lost daughter should be within the class. However, if she had been formally adopted, then depending on when the adoption had taken place, the daughter might have lost her rights to benefit as a "child" of her natural parents. A power of addition would permit a trustee to re-add an adopted child to the beneficial class.

Asset Protection

Trusts have long been the gold standard for asset protection, particularly where the settlor is excluded from benefit. Some doubt has recently been cast on the efficacy of trusts as a result of the decision in Pugachev. In that case, the English court found that five New Zealand trusts were ineffective to shield assets from a creditor seeking to assert a beneficial interest in those assets. The court found that the trusts were illusory, in that the settlor had retained enough non-fiduciary powers as to be able to direct the disposition of the assets as he pleased, including to himself. In addition, the court found that if the trusts were formally effective so as to deprive the settlor of ownership, then they were a sham. Finally, the court indicated that it would have accepted an argument that s. 423 of the Insolvency Act 1986 was satisfied, in that the assets had been settled on trust in order to put assets beyond the reach of a person who was making or might at some time make a claim against the settlor.

The decision in Pugachev has naturally been of some concern. While most of the attention has focused on the illusory trust and sham aspects, it is really the s. 423 aspect that is the most concerning from an asset protection perspective. Illusory trusts are the result of unfortunate drafting, and sham trusts necessarily (on the Pugachev analysis) involve a trustee willing to involve themselves in a sham. Section 423, on the other hand, requires only a transaction at no consideration or at an undervalue - nearly always the case when settling property on trust - coupled with an intention to prejudice a person or persons who might later make a claim. The intention has received an unclear treatment by the courts: there is authority that prejudicing creditors must be the dominant purpose and authority that it need only be a substantial purpose. The most recent case rejected the epithet "substantial" and found that it need only be "a purpose" of the transaction.

But while an English court might make an order under s. 423, enforcement is a different question. Where the situs of the assets is outside the jurisdiction of the English court, a foreign court might not cooperate in making them available to a creditor due to firewall legislation. For example, art. 9(1)(b) of the Trusts (Jersey) Law provides that "any question concerning... the validity or effect of any transfer or other disposition of property to a trust...shall be determined in accordance with the law of Jersey and no rule of foreign law shall affect such question." Even if the English court refused to recognise the firewall in determining whether to make an order under s. 423 - an open question at the moment - the Jersey court (or a court elsewhere with a firewall) might refuse to recognise the judgment for the purposes of enforcement against assets in Jersey.

Most, if not all, of the well-known offshore jurisdictions make similar provision. Magwitch might be best advised not to have an English trust and not to hold English assets. However, he could establish his trust in Jersey, Guernsey, Gibraltar (although the EU carve-out might suggest otherwise), the Cayman Islands or the British Virgin Islands, among others. Magwitch's assets consist of the paper securities in his wallet, money in New South Wales and "certain lands of considerable value". He would probably wish to alter some of his investments, so as to ensure that they were out of reach of an adverse judgment.

There is a further dimension to Magwitch's situation, which is that at common law, the court has no jurisdiction to entertain an action for the enforcement of a penal, revenue or other public law of a foreign state. If the Crown were seeking to obtain Magwitch's assets based on felony forfeiture, a foreign court where the trust was situate might refuse to hear the proceedings if local law included that common law rule.

Anonymity

Anonymity between settlor and beneficiary is something that does not come up very often. In jurisdictions that follow Schmidt v. Rosewood Trust, the trust instrument would be the first stop for the curious beneficiary. Most trust instruments will identify the settlor, so that all that a beneficiary need do is ask the trustee for a copy of the instrument.

That is not universally the case. There was a trend, particularly in Jersey in the 1980s and 1990s, for a trust to be established by a formal settlor with a nominal amount of cash. The bulk of the trust property would then be supplied by the economic settlor. The formal settlor would be identified in the instrument establishing the trust, but the economic settlor would not. Such a device might work for Magwitch, but the risk would be identification through some other trust document, such as minutes accepting the further donation, or a letter of wishes in a jurisdiction where letters of wishes are considered disclosable.

Magwitch could establish his trust in a jurisdiction in which beneficiaries' rights to information and trust documents is limited. For example, in the Bahamas, s. 83 of the Trustee Act relieves trustees of any obligation to inform objects of discretionary powers of their rights under a trust or to disclose trust documents to them, although some person with a power to enforce the trust must be aware of the existence of the trust and his or her right to enforce it. That could be a fairly simple solution, although Magwitch would probably wish to ensure that any restriction on beneficiaries' rights to information was based on statute rather than judicial decision, so as to have a greater level of certainty that the law will not change.

A different, and more watertight solution, could be to establish a Cayman Islands STAR trust. The feature of STAR trusts of which Magwitch would be taking advantage is that they are not enforceable by the beneficiaries, but by an enforcer. The enforcement rights include the right to be informed of the terms of the trust, to receive information concerning the trust and its administration from the trustee, and to inspect and take copies of trust documents: s. 102 of the Trusts Law. So Magwitch could establish his trust, with a wide class of beneficiaries and a power of addition, and keep it a secret from Pip, who would have no enforcement rights.

Conclusion

In the modern world, Magwitch would have many options open to him. Dickens himself averted to the possibility of a settlement, which might have protected Pip's expectations. However, it is doubtful that an English settlement of English property would achiveve everything that Magwitch wanted. On the other hand, his "portable property" can easily be resituated in any convenient jurisdiction. The laws of a number of international financial centres would help Magwitch to bring Pip up as a gentleman under a cloak of anonymity, protect the trust assets against forfeiture to the Crown and provide the flexibility to help Estelle even after it was beyond Magwitch's ability to help her himself.

To me, it looks as though the Cayman Islands tick all the boxes, with the possibility of establishing a STAR trust, but I'd be interested to see all other suggestions in the comments.