Letters of Wishes in Discretionary Trusts

In a discretionary trust, ownership and control of the settled assets is necessarily given to the trustee by the person transferring the assets into the trust. The transfer of ownership and control to the trustee gives the trustee unfettered discretion to deal with those assets subject only to the terms of the trust. The transfer may serve different purposes, including for example, the desire to place those assets beyond the reach of the creditors of the transferor.

The ceding of ownership and control can be scary for settlors. Settlors are often concerned with whether the trustee can, in fact, be trusted to accede to their wishes. A common tool to address the fear over the loss of the assets is the use of a letter of wishes in conjunction with the appointment of a protector who can replace the trustee if the protector considers that the trustee is not following this letter. The Hong Kong courts have confirmed that a trustee should indeed follow the wishes expressed in such a letter unless doing so would be inconsistent with the duties of the trustee given the terms of the trust.

What is a Letter of Wishes?

A letter of wishes expresses the wishes of a settlor as to what the settlor wants to the trustee to do in relation to particular matters which arise from time to time in the life of the trust. By a letter of wishes, the settlor is able to provide both long-term and short-term guidance to a trustee. Such guidance may, for example, relate to how the trustees are to exercise their discretion in relation to the management of the trust assets and how the trustees are to exercise their discretion in relation to decisions as to which of the beneficiaries should receive a distribution from the trust assets, when such distribution should be made and how much such distribution should be.

Can a Letter of Wishes be Updated?

A letter of wishes may be updated from time to time with little formality. Thus, a letter of wishes enables the settlor to make changes to the trust arrangements from time to time with relative ease and without the procedural formality required to amend a trust deed.

Is a Letter of Wishes Legally Binding on the Trustee? Can a Letter of Wishes be Ignored?

A letter of wishes imposes no legal obligation on the trustee to follow them. However, the trustee needs to take the letter of wishes into account in exercising its powers as a trustee and the trustee is entitled to follow the letter of wishes if it is in accordance with the trustee’s duties. Very often – sometimes always – a trustee will follow the letter of wishes. In this regard, in Kan Lai Kwan v Poon Lok To, the Court of Final Appeal in Hong Kong cited the following passage with approval:

There is no doubt that trustees can properly take into account any expression of wishes, formal or otherwise, on the part of the settlor as to how they should exercise their discretionary powers, and indeed that they should have regard to any such wishes expressed to them.

Why Is it Not Possible for a Letter of Wishes to Bind the Trustee?

Under Hong Kong law, a trustee must apply his mind to the exercise of any power or discretion. The trustee must not act merely under the dictation or instruction of another. To do so is a breach of trust. Any exercise of the trustee’s power must be a personal and conscious act of the trustee himself.

There can be no fetter on the discretionary powers of a trustee. Any attempt to impose an unauthorized fetter on a discretionary power of a trustee is totally ineffective. In other words, an undertaking outside the trust deed that a trustee will exercise its powers in a particular way cannot be enforced.

If a Letter of Wishes Does Not Bind the Trustee, How Does it Work?

A trustee can properly exercise his powers to give effect to the wishes of the settlor or, indeed, a beneficiary of the trust, provided the trustee himself has considered the matter and makes the final decision himself. The trustee must be prepared to reject any request expressed in a letter of wishes but he need not refuse the request simply to prove he is exercising his powers independently.

In other words, so long as a trustee does not blindly obey the wishes communicated to him, there is no reason why a trustee should not follow these wishes. This is so even if following those wishes would lead to a course of action which the trustee would not otherwise have adopted and even if the trustee’s decision is prompted by a request by a beneficiary or by the settlor in a letter of wishes.

The fact that a trustee regularly and indeed, invariably follows the wishes communicated to him does not mean that he is blindly obeying those wishes. Compliance with those wishes is equally consistent with a properly administered trust where the trustees have properly considered the interests of the settlor (or the beneficiary) and have concluded that those wishes are reasonable and in the interests of the beneficiaries. Indeed, where a request made of a trustee is reasonable in the context of all the circumstances, it would be the exception rather than the rule for the trustee to refuse the request.