Trusts and Dynastic Planning: Letters of Wishes and the Limits of Trust Flexibility

In almost all cases, if you establish a modern discretionary trust, you will be asked to prepare a letter of wishes to be kept alongside the trust instrument, addressed to your trustees. You will likely be told by your advisors – and the letter will likely make clear – that those wishes will not be binding on your trustees.

What purpose does a letter of wishes then serve if the trustees are not bound to follow it? Here we look at the role of letters of wishes (including subsequent updates to letters of wishes) within trusts, including questions of the capacity to express wishes and the weight that trustees need to give to them.

Degree of Flexibility  

Discretionary trusts do not provide beneficiaries with a right to a fixed interest in the assets held in trust. Whether or not a beneficiary receives a benefit is up to the trustees’ discretion – the beneficiaries are described as having a “mere hope” of becoming the object of the trustees’ power to benefit them. This makes a discretionary trust flexible. This flexibility usually also extends to the trustees’ administrative powers such as the power of investment, which will be drafted in a broad way, leaving trustees to invest in a manner they see fit and potentially to take advice from or even delegate decisions to third parties (although always underpinned by their duty to act in the best interests of the beneficiaries).

As a prospective settlor of a trust, the ambit of discretion given to the trustee can be daunting. Not only is the settlor choosing to transfer significant assets to a trustee but, on the face of the terms of a discretionary trust, the settlor gives the trustee total freedom as to how to benefit the chosen beneficiaries and manage the assets while they remain in trust. Of course, this is an equally daunting challenge for trustees. How are trustees expected to know how and when to exercise the powers they have been given? This is where the letter of wishes comes in.

By setting out their intentions for creating the trust in a letter of wishes, and how they wish the trust to be administered in the future, a settlor can provide non-binding guidance and relevant considerations to trustees. Letters of wishes afford a settlor a degree of flexibility because (to an extent) they can be updated over time as the settlor’s wishes and the beneficiaries’ circumstances evolve.  

Purpose of Letter of Wishes

A letter of wishes is not a binding instruction manual that the trustees are bound to follow. However, a trustee is obliged to take into account all relevant considerations when deliberating on the potential exercise of a power. A letter of wishes therefore serves a purpose as a vessel for relevant considerations the settlor wishes to pass to the trustee. This could include specific matters the settlor would like the trustee to take into account, such as giving thought to supporting particular beneficiaries with respect to education costs and housing. Aside from information relating to potential beneficiary needs, the letter could also detail matters such as types of investments to favour or avoid.

A settlor can update a letter of wishes from time to time as their wishes evolve and circumstances change. These subsequent letters of wishes are also relevant considerations for the trustee to take into account, and it may be that more weight ought to be given to more recent ones and, in certain respects, older ones disregarded. Subsequent letters of wishes may also serve an additional purpose for the trustees because they will likely provide the trustee with updates as to the circumstances of the beneficiaries (for example marriages, children or changes in health or wealth positions). This context is also likely to be treated as a relevant consideration for the trustee’s decision-making process.

However, current case law suggests that the first letter of wishes prepared at the time a trust is settled also serves another very important purpose. This first letter of wishes can provide important contemporaneous evidence as the purpose for which a trustee’s powers have been conferred by the settlor. For example, it may confirm that the trust has been set up to benefit the settlor’s children and remoter descendants. This may be a crucial piece of evidence and has the ability to shape the administration of the trust. In Grand View v Wong [2022] UKPC 47, a court found that a trustee’s exercise of its powers to add and remove beneficiaries was invalid because it was not exercised in line with the “proper purpose” for which those powers had been conferred. The Wong case was an extreme example whereby the trustee had exercised powers to remove family member beneficiaries altogether and add in their place charitable objects.

This highlights both the potential “stickiness” of the first letter of wishes (at least with respect to some aspects of the administration of a trust), and potential limitations as to the role of subsequent letters of wishes.  If the intention is for the trust to be flexible in who it can benefit and in what way, it is best to build this in from the outset, rather than retrospectively. That first letter of wishes may not cease being relevant to delineating the extent of trustee powers that may on analysis be narrower than they seem under the trust instrument.

Settlor Capacity and Undue Influence

There are certain circumstances in which a trustee ought to exercise caution when looking to treat an updated letter of wishes from the settlor as a relevant consideration for its decision making. A trustee should not follow letters of wishes blindly, and this extends to considering the possibility that the letter of wishes was prepared by a settlor who was either acting as a result of undue influence or did not possess the mental capacity to make such a wish.

How great is the burden on trustees to establish (a) absence of undue influence and / or (b) presence of mental capacity on the part of the settlor? Every case will depend on its facts, but a trustee is only required to come to a reasonable decision on the evidence available to them. This likely means that questions surrounding undue influence and capacity would come to the fore on the appearance of “red flags”. For example, a letter of wishes whereby the settlor sought to cut out all beneficiaries in favour of a new partner might raise eyebrows and put the trustee on notice of a potential issue.

The issue of undue influence came before the Grand Court of the Cayman Islands in 2022 in Re The Poulton Family Trust. The settlor here purported to exercise powers he held under the trusts (rather than expressing wishes) excluding his children from the beneficial class. This was executed in the context of him suffering from terminal cancer and his wife preventing his children access to him in his final months without his knowledge. Highlighting the importance of evidence as to purpose contemporaneous to the time a trust was settled, one of the key pieces of evidence leading to the court setting aside the exclusion document was evidence that the trust had been set up with a desire to benefit all his children.

Questions of mental capacity to make lifetime decisions have been considered in this context in In the matter of the O Trust [2018], citing Re Beaney [1978] 1 WLR 770. These cases suggest a threshold on a sliding scale “relative to the particular transaction which it is to effect” in the context of whether a settlor has the capacity to exercise a reserved power, and it seems likely the same might be said with respect to the preparation of updated letters of wishes. The practical effect is that for more modest wishes (modest in the context of the value of wealth of that particular trusts) or minor modifications and updates to previously expressed wishes, the trustee may be comfortable to make more modest inquiries than those where a significant change in wishes seems to be being expressed.

Concluding Remarks

In summary, in the context of letters of wishes:

• on the part of a settlor who is looking to set up a trust, it will pay dividends to seek advice not only on the terms of the trust itself but also on the preparation of the first, and subsequent letters of wishes. There is a balance to be struck between ensuring the drafting is not so narrow so as to constrain the ability of the trust to evolve over time but not so broad so as to confer unworkably broad discretions on a trustee; and
• on the part of a trustee who receives an updated letter of wishes, again, it would be wise to discuss with an advisor the impact of the changes being requested as against evidence of the settlor’s intentions at the outset of the trust, to decide whether it warrants further investigation, and the degree of investigation required.