Letters of Wishes

Nature of a letter of wishes

A “letter of wishes” has been described as being “a mechanism for the communication by a settlor to trustees of the settlement of non binding requests by him to take stated matters into account when exercising their discretionary powers” (see Breakspear v Ackland [2008] EWHC 220).  Such a letter may be produced in relation to an inter vivos settlement or a testamentary trust. It will usually state that the wishes expressed in it are non binding.

Letters of wishes are most commonly produced in relation to the issue of how a settlor or testator would like the income and capital of a discretionary trust fund to be applied. However, they might also usefully be produced in relation to the exercise of an overriding power of appointment in relation to a flexible interest in possession trust or the exercise of an administrative power such as a power of investment or a power to add beneficiaries.

One reason that a testator might decide to create a discretionary trust of residue is because there are fraught family relationships and the testator wants to leave it to trustees to make decisions as to how the family are to benefit. They may wish to express sentiments to the trustees about family members which they would not want widely known. In such a case, the production of a detailed letter of wishes is crucial. However, even in less controversial circumstances, a letter of wishes should be produced so that there is no doubt as to what the relevant wishes of the settlor or testator were.

Although a letter of wishes is in essence a non binding document, it is important because it is a relevant consideration to be taken into account by trustees in relation to the exercise of their discretions. It was confirmed in Pitt v Holt [2013] UKSC 26 that “the settlor’s wishes are always a material consideration in the exercise of fiduciary discretions.” The better view is that the trustees must take the contents of a letter of wishes into account although they are not bound to follow it. That process will involve a consideration as to whether it is proper to follow such wishes in the interests of one or more of the beneficiaries of the trust. The trustees must still form their own view and they must not unthinkingly follow the wishes of the settlor or testator.

Whilst a letter of wishes is only one factor for trustees to take into account when considering the exercise of a discretion, in practice, most trustees will endeavour to follow those wishes if they possibly can. As is stated in Lewin on Trusts “trustees therefore rightly give great weight to the settlor’s wishes, either expressed from time to time during his lifetime or recorded, usually in documentary form, before his death.” However, that does involve interpreting those wishes accurately (see Abacus Trust Co (Isle of Man) v Barr [2003] Ch 409). Trustees should also take into account any orally expressed wishes of the settlor or testator but it may be more difficult to establish what they were, if not formally recorded.

A settlor or testator can and should update a letter of wishes from time to time. Earlier letters of wishes may be superceded by later ones as a matter of construction or they may all remain of relevance if they deal with different issues. The first letter of wishes is likely to remain of relevance in any event in determining what a settlor’s purpose was in conferring a particular power on the trustees (see Wong v Grand View Private Trust Co Ltd [2022] UKPC 47).

A letter of wishes is likely to be of diminishing importance where it was made many years previously, particularly if there has been a material change of circumstances such as a beneficiary suffering serious health or financial problems.

When might it be legitimate for trustees to decide not to follow the letter of wishes? It must be remembered that the trustees are subject to an overarching duty to administer the trust for the benefit of the beneficiaries. Therefore, one circumstance would be where those wishes are unreasonable. For example, A created a discretionary trust of residue worth £10m but indicated that he did not want any of his family to ever have access to income or capital as of right. That view was not based on anything in the beneficiaries’ circumstances which made such a view appropriate but simply A’s desire to control his family from the grave. The consequence of following his wishes would be that no use could be made of the spouse exemption and anniversary charges would be incurred, diminishing the trust fund. Another example might be if the settlor or testator wanted the trust fund to be invested in a manner which the trustees considered would prejudice the beneficiaries.

Disclosure

A beneficiary may ask the trustees to provide a copy of the letter of wishes. Trustees must proceed cautiously in that regard. The exercise of discretionary dispositive powers by trustees has traditionally been regarded as an inherently confidential process as it is in the interests of the beneficiaries of family discretionary trusts and advantageous to the due administration of such trusts that the exercise by the trustees of their powers be treated from start to finish as confidential (see Breakspear endorsing the approach in Re Londonderry’s Settlement [1965] Ch 918).

This means that trustees are usually well advised not to give voluntary disclosure of a letter of wishes. If the trustees do not disclose the letter of wishes, it is obviously far less likely that a beneficiary will seek to challenge the validity of any decision they make by reference to that letter. The trustees should also not give reasons for any decision to refuse to disclose the letter of wishes. It was confirmed in Breakspear that they are not obliged to give reasons in that regard, but, that if they give any reasons, then the Court could review the decision.

Despite this, the trustees can still choose to disclose the letter of wishes to a beneficiary if they consider disclosure to be in the best interests of the beneficiaries and the due administration of the trust. In that regard, they are not bound to follow a direction from the settlor or testator that the letter should not be disclosed.

Court application

If the trustees do not voluntarily disclose the letter of wishes, would the Court order disclosure? The traditional view was that a beneficiary had the right to call for accurate information as to the state of the trust and that the trustee had to be ready with their accounts. The beneficiary was also considered to have the right to inspect trust documents at all reasonable times and to take copies at their own expense. However, circumstances might warrant the withholding of disclosure, such as where it related to the exercise of trustees’ dispositive powers.

In Schmidt v Rosewood [2003] UKPC 26 the Privy Council held that a beneficiary did not have an automatic right to the production of trust documents but they could apply to the Court to seek disclosure of them. Whether disclosure would in fact be ordered was in the discretion of the Court. This was an aspect of the Court’s jurisdiction to supervise trusts and to intervene in their administration and it extended to discretionary beneficiaries. However, the Court still recognised that the need to protect confidentiality was one of the most important limitations to the disclosure of trust documents.

Although a letter of wishes is an important part of the trustees’ decision making process and it can be argued that disclosure would enable beneficiaries to ascertain whether trustees are acting properly, the Court will usually not order disclosure of it. In Breakspear it was stated that “it is therefore brought into existence for the sole purpose of serving and facilitating an inherently confidential purpose. It seems to me axiomatic that a document brought into existence for the sole or predominant purpose of being used in furtherance of an inherently confidential purpose is itself properly to be regarded as confidential.”

There can be exceptions to this. In Breakspear itself disclosure was ordered of the letter of wishes on the basis that it would have to be disclosed in relation to the trustees’ intended application for Court approval of the exercise of their dispositive discretions and disclosure now was likely to avoid delay and cost.

Another exception would be in relation to litigation between the trustees and beneficiaries, such as a challenge to the exercise of powers by the trustees. There the beneficiaries’ entitlement to disclosure is based on their status as litigants and not beneficiaries. In that context, relevance and necessity are the governing criteria and confidentiality is a subordinate consideration. However, the Court warned in Breakspear that the Court would adopt a robust approach to spurious litigation brought by beneficiaries as a fishing expedition simply to secure disclosure of the letter of wishes.