Your wish is my command? Next gen wealth is discussed in ThoughtLeaders4 Private Client Magazine

This article was first published with ThoughtLeaders4 Private Client Magazine. To read the full magazine, click here.

The trustee’s view

One of the first things we tell our settlors when they are thinking of setting up a trust is that they should always express their wishes regarding what they would like to happen after their death by writing a letter to the trustee, to guide them when they are exercising their dispositive powers. It comes with the usual caveat that we are not, of course, bound to act upon those wishes, but it is an important note to have on file and will be taken into account when making decisions. This can be helpful reassurance for settlors who worry about how matters will evolve after they have died, and there is some expectation that those wishes will indeed be followed, and that the trustees will not make a decision that is “perverse or irrelevant to any sensible expectation of the settlor”(1).

Best practice would tell us that this letter should be reviewed as life circumstances change, not be too prescriptive (so it could be construed as an instruction to the trustee) and acknowledged by and discussed with the trustee regularly so as to ensure the intentions behind the letter of wishes are clear and understood. But of course, whilst best practice can be encouraged, it does rather depend on the settlor.

Of course, one always comes across the settlor who finds the prospect of facing their mortality a difficult one, and so the drafting of the letter of wishes is always a task put off for another day. Usually, it is the formality of having to put wishes down in writing which tends to invoke this reluctance. Without some guidance, trustees could be left in quite difficult circumstances where the class of beneficiaries is wide and when family tensions were known. We do see this from time to time, where the drafting or signing of the letter of wishes is on the ‘to do list’ long after the trust deed has been signed. Whilst it is impossible to force the issue of signing a letter or memorandum, it is always useful and also acceptable for a trustee to keep their own detailed notes from meetings where wishes are expressed generally, and other advisers are also present, in the hope that they are recorded in some way and could be referred to in the future.

By complete contrast, there is the settlor who wields the letter of wishes as a ‘power play’, so they feel that they retain control somehow over the trust fund. We have seen settlors update their letter of wishes as frequently as several times per year, and who ‘summons’ their advisers after arguments with family members to make changes to the letter.

This scenario with the indecisive settlor is obviously difficult for a trustee to navigate- if the settlor dies just after making a significant change to the letter of wishes so as to favour one beneficiary over another due to a seemingly trivial incident, and there is precedent to this happening in the past, can the trustee rely on it? Could the reason for the erratic behaviour be due to a lack of, or fluctuating mental capacity, and should the views of other advisers be sought if there is a concern about capacity?

Letters of wishes do tend to be shrouded in secrecy, and we have had a few instances where the settlor has written a letter of wishes, but not shared it with us as trustee, and asked his lawyer to keep it vaulted until his death. Presumably, it is because it will prove to be fairly controversial for the settlor’s family, but a much better approach would be for the trustee to be aware of any issues and to be able to discuss it in full with the settlor during his lifetime. In other circumstances, we have seen settlors share their letters of wishes freely with their families during their lifetimes, so all issues are aired and there can be no confusion about the intentions on any part. This would seem to be a much more openhanded way of tackling with any issues head on.

The advisor’s view

While trustees are not legally bound to follow a settlor’s letter of wishes, under English law they are bound to take it into account when considering whether and how to exercise their powers and discretions(2). The logic is that the trustees stand in place of the settlor in relation to his assets and are given dispositive powers in order to make choices that the settlor could have made, therefore they should consider his wishes in making those choices.

Indeed, the Supreme Court  has found that the settlor’s wishes “are always a material consideration in the exercise of fiduciary discretions” (3).

From a legal perspective, when considering the exercise of their powers the trustees have a duty to take relevant matters into account and ignore irrelevant matters(4). The settlor’s wishes are not the only factor which trustees must consider when reaching a decision. They should also have regard to other relevant factors, such as the beneficiaries’ needs and wishes. This can lead to conflict where a settlor expresses wishes that may be arbitrary or unfair to certain beneficiaries. In such circumstances, it is key that the trustees should act rationally (noting that rationality is not equivalent to reasonableness)(5).

As Joanne mentions above, from the trustee’s perspective matters are often easiest where a settlor shares the contents of any letter of wishes with their family, or if a letter is simply used as a record of wishes that have already been fully discussed with all beneficiaries. Where this is not the case, the trustee can face a difficult decision as to whether they should disclose the contents of the letter to the beneficiaries, perhaps as part of explaining the reasoning for a decision. Under English law, the general rule is that the court will not order disclosure of a settlor’s letter of wishes for a discretionary trust(6). The reasoning for this approach is that the letter of wishes operates within the confines of the powers and parameters set by the trust deed, containing material which the settlor wishes the trustees to take into account when exercising their discretionary powers as set out in that deed. Accordingly, a letter of wishes is a document forming part of the decision-making process on the exercise of discretionary powers which should be protected by confidentiality(7).

So, when should a trustee disclose the contents of a settlor’s letter of wishes to the beneficiaries of the trust?

Disclosure should only be considered by the trustee if doing so would discharge the trustees’ powers and discretion and if it is in the interests of the sound administration of the trust. Crucially, the interests of disclosure should outweigh the protection that confidentiality offers, taking into account the objective consequences (for example, the potential for future challenge to the trustees’ exercise of their discretionary powers). Where trustees do decide to proceed with disclosing part or all of a settlor’s letter of wishes to a beneficiary, they should consider redacting this as appropriate.

While a letter of wishes can be helpful for the trustees in summarising a settlor’s wishes at that moment in time, no letter can cover every possible scenario. Rather than attempting to set out prescriptive guidance for different situations, it is often more useful for a settlor to set out guiding principles which they would like the trustees to consider taking into account the circumstances at the time.

1. Re Manisty’s Settlement 1974
2. Kain v Hutton 2004
3. Pitt v Holt 2013
4. Edge v Pensions Ombudsman 2000
5. Hayes v Willoughby 2013
6. Breakspear v Ackland 2008
7. Re Londonderry’s Settlement 1965