Shân Warnock-Smith Q.C. presented at the STEP Caribbean 2009 conference in Puerto Rico in May. Her presentation covered the important subject of the use and abuse of Letters of Wishes. This is the first in a series of articles.
To explain just why Letters of Wishes are so important in the context of Trusts, Warnock-Smith quoted Lewin on Trusts as follows:
“…. Even if it goes too far to say, as some say, that the letter is an essential component of, or companion to, the trust instrument itself, the letter is normally a document of much importance in evaluating the prospects of beneficiaries benefiting under the trustees’ dispositive powers and discretions, and the extent and nature of their true expectations, something in respect of which little or no guidance may be given by the trust instrument itself. Further, and especially if there is a duty for the trustees to have regard to the settlor’s letter of wishes, the letter may be an important document in assessing the propriety of the trustees’ exercise of their powers and discretions, or a refusal to exercise their powers in the manner requested by a beneficiary”.
Warnock-Smith explained that in the context of a settlement which gives the trustees wide discretions, a properly-used Letter can be of great assistance to all the main parties involved: the settlor, as a means of giving guidance to his trustees, consistently with the flexibility he has given them; the trustees, who without it are operating to a degree in the dark, and the beneficiaries, who are often keen to know what they can expect or why their hopes have been dashed if they have been.
According to Warnock-Smith, many trustees, especially professional trustees, effectively insist on a Letter to help them in their task and she says one can readily understand that instinct. This can, however, lead to difficult issues, as she explained: “The Letter can assume the status of holy writ which the trustees are tempted to follow slavishly. It becomes a rival to the trust instrument rather than its complement. It is also likely to be written more casually than the trust instrument because it is intended to be an expression of the settlor’s individual wishes (even though often drafted by lawyers) and may be unclear or in conflict with the trust instrument: the result is a construction issue in which the meaning of the Letter assumes an importance which it should not strictly have.”
She continued: “The settlor can get upset when the trustees demonstrate true independence and make a decision which does not accord with the Letter. The beneficiaries, if they get to see the Letter, get upset either by its contents or by its description of the beneficiaries (“worthless”, “drug addicted” etc) or complain when either the trustees make a decision in accordance with the Letter or one which appears to contradict it.”
According to Warnock-Smith, if the relationship between settlor/trustees/beneficiaries can be described as a minefield, the Letter is often the unexploded bomb in its centre which, if it goes off, can cause damage on a huge scale – to human relationships and to the value of the trust fund if expensive trust litigation results. She said: “ No wonder that trust litigators regard the Letter, if any, as an essential piece of ammunition in their armoury when planning an attack or defence.”
The following are some frequently asked questions (and their suggested answers).
Do I have to take the Letter into account when I exercise my discretions?
The Letter usually starts with some stock phrase about its acting merely as guidance to the trustees and its not being in any sense intended to be binding and the assumption will be that such Letters are not binding. If the Letter is highly detailed and prescriptive, that stock phrase may ring rather hollow and in some cases there may be an argument that the Letter in fact forms part of the trust instrument itself even if it is not so expressed. If so, an apparently discretionary trust may have been turned into a fixed interest trust which nobody wanted – and the trustees would be bound to follow the prescriptive terms of the Letter. Even worse, if such a Letter is inconsistent with the terms of the trust instrument there may be a question whether the trust instrument should be rectified to accord with the settlor’s apparent true intentions. Or even worse, that the whole thing is a sham.
But assuming that the “it’s only a wish” formula establishes the Letter’s status as just that, the three questions which follow are these:
Are the trustees entitled to take the Letter into account?
Are they bound to take it into account?
What weight should they give it?
Yes – it is well established that trustees are entitled to take account of the settlor’s wishes as part of the “relevant considerations” to which they may legitimately have regard. The settlor could have made specified gifts to the beneficiaries directly but has chosen to use the trustees as the means to do so – accordingly his wishes ought to be given serious weight. He can shed light on the purpose for which particular powers were given and how he envisaged they might be exercised.
If the Letter is indeed a relevant consideration, then the rule should be that the trustees are bound to take it into account because their duty as fiduciaries in exercising their discretions is to take into account relevant considerations and to disregard irrelevant ones. But there is some debate on the point. Lewin (para. 29-150) describes the above as “the better view” but some cases have described it as “an informal document which the trustees are free to ignore” (Re Rabaiotti) or bringing “no legal obligation” (Re Esteem Settlement  WTLR 1) The editors of Underhill and Hayton 16th ed. p. 62 suggest that it should be possible to devise a Letter which is intended only to impose a moral obligation on the trustees to consider it rather than a legal one which would make them bound to do so. The suggested wording:
“This letter is not to be regarded as indicating in a legally significant way the purposes for which the powers in my trust deed have been conferred on my trustees because I do not want them to have any extra legal obligations placed upon them by this letter so as to have to go out of their way to defend their conduct. I believe the imposition of such extra legal obligations would cause more difficulties than benefits to accrue, creating greater cost burdens and proving likely to upset relationships between my beneficiaries. Thus my trustees are only to be under a moral obligation to take into account the following wishes of mine and shall not be accountable before the courts in relation to taking into account or failing to take into account such wishes. Indeed, they are not legally obliged to pass this letter on to successor trustees although I would hope they would consider themselves morally bound to do so”.
(a) What is the nature of a “moral obligation” vis a vis a trustee? A fiduciary has well-defined duties and powers, all of which can be controlled by the court if necessary, but is accepting additional moral obligations amongst them? Does that not cause more difficulty than it resolves? How can the court control a moral obligation? If the trustees take it into account are they not considering an irrelevance?
(b) Why bother? Even if there is a duty to take the Letter into account, it is only one of several considerations which the trustees must weigh in reaching their decisions. It is not suggested that the trustees are bound to follow the Letter, indeed that is precisely what they should not do.
See above. It is for the trustees to consider the Letter with all the other considerations and give it such weight as they think fit. Circumstances may have changed since the letter was written, beneficiaries grown up, the nature of the trust assets changed – even if the trustees would have followed the Letter, all other things being equal. What they must not do, of course, is follow it slavishly to the exclusion of all else.
Do not talk about moral obligations. Non-binding is fine if it means, as it should, that the trustees are not bound to follow the wishes expressed rather than that the Letter should have no status at all.
The Letter is a relevant consideration to be taken into account.
If it is a relevant consideration it follows that the trustees must take it into account even if they do not follow it.
Consider putting something in the trust instrument if you are concerned – it should be possible (because it would modify an existing legal obligation rather than introducing an uncertain moral one) to say that the trustees may take it into account but do not have to – and perhaps go on to say that they certainly do not have to follow it.
Read more on the subject in next month’s Journal.