Letter of Wishes

‘Letters of wishes’ play an important role in respect of trusts; both those created on death (by Will) and during lifetime.

Letters of wishes are closely associated with ‘discretionary trusts’, whereby trustees are given discretion over which beneficiaries to benefit and whether through distributions of income and/or capital. However, any trust (be it a charitable trust or ‘life interest’ trust (where one or more beneficiaries has a right to the income from the trust)) should be accompanied by a letter of wishes or other guiding document, so that the trustees have a clear sense of the objectives of the settlor (the person creating the trust).

The role of the letter of wishes

The purpose of the letter of wishes is to provide guidance to the trustees as to the manner in which the settlor would like the trust fund to be administered for the benefit of his or her chosen beneficiaries. Letters of wishes are not legally binding (noting that if they were then the letter, in itself, may create a separate trust), although it would be unusual for trustees to deviate from the settlor’s wishes, unless there are compelling reasons for doing so.

The advantages of letters of wishes

Letters of wishes have a number of advantages:

1. In contrast to an English law Will, which becomes a publicly accessible document on death, letters of wishes are confidential. Only in very limited circumstances will the English courts order disclosure of a letter of wishes.
2. Letters of wishes add an additional level of flexibility, as they can be amended or updated by the settlor whenever they wish, without the need to amend the underlying Will or trust instrument.
3. Letters of wishes can be used to provide detailed, personal guidance to the trustees, which may not be appropriate to include in the Will (particularly given that it may become public) or trust deed. Whilst the first draft of a letter of wishes is usually prepared by a solicitor to ensure that the key provisions are included, the settlor is encouraged to make it their own as it is a highly personal document intended to capture his or her particular wishes. This means that letters of wishes are also easier for trustees (particularly non-professional trustees) and beneficiaries to understand and use, in contrast to the underlying legal document, as they are not written in legalistic language.

The contents of a letter of wishes

Whilst the below list is not intended to be exhaustive, letters of wishes can provide guidance in respect of the following points:

1. First and foremost, how the settlor intends for beneficiaries to be provided for out of the trust fund (for example, whether they should receive income and/or capital at particular ages, or on the happening of particular life events).
2. The factors the settlor would like the trustees to take into account when deciding when or how to make distributions to a beneficiary. For example, the letter of wishes may request trustees not to make distributions where a beneficiary is unable to manage his or her finances properly (e.g. as a result of addiction to alcohol or drugs) or is going through a divorce. It is not uncommon for letters of wishes to go one step further and to request that beneficiaries enter into pre-nuptial agreements before receiving trust distributions (to ensure that the trust fund is protected, so far as possible, in the event of a beneficiary’s divorce).
3. A ‘default beneficiary/beneficiaries’, that is the person(s) or charitable institution(s) that the settlor wishes to receive the balance of the trust fund in the event that none of the specified beneficiaries are alive when the trust comes to an end.
4. Provision for charitable giving: setting out how, when and which charitable institution(s) the settlor would like to benefit from the trust.
5. Special guidance regarding complex assets (for example, shares in a family business) or assets that qualify for special tax treatment and for which it may be beneficial to create a separate fund within the trust (for example, interests in trading businesses that qualify for ‘business property relief’ from UK inheritance tax).
6. The settlor’s wishes regarding the investment approach to be taken in respect of the trust fund.
7. Guidance regarding the approach that should be taken to resolving any disputes that may arise in respect of the trust (e.g. encouraging parties to mediate in the first instance).
8. In respect of letters of wishes accompanying Wills in particular, funeral and/or burial wishes may also be included, as well as provision for the distribution of personal effects, such as artwork and jewellery.

For further information please contact Private Client Partner, Jeremy Robertson, or Associate, Laura Blenheim.