The all-important wishes of the settlor

As for will trusts, even if the discretionary nil rate band trust has lost its appeal  (for the purpose of using the nil rate band on the death of the first of a couple to die) with the introduction of the transferable nil rate band,  it may still be appropriate and remains quite popular for a number of reasons. One of the reasons is the fact that the trustees of a discretionary will trust have a two-year period within which to distribute the trust fund and have all such dispositions read back into the deceased's will (section 144 IHT Act 1984).   Imagine a (real-life) case where a testator has left a will and fifteen codicils - someone who seemed to fall in and out with family members on average every 6 months or so, following which a new codicil would be made either providing legacies to the (then favourite) family members or conversely disinheriting some others. How much simpler to just make one discretionary trust and provide the trustees/executors with a letter of wishes.  

The importance of the letter of wishes

Under both the flexible trust and fully discretionary trust, (assuming the settlor has not actually reserved any power of appointment for himself), the trustees will decide which of the beneficiaries will receive any capital benefits.

The trust deed, or the will as appropriate, will typically provide that "the trustees may (or have power to) ...in such manner as they may in their absolute discretion think fit",  Needless to say, there is no such thing as an "absolute" discretion - the trustees are still obliged to act properly in accordance with the trust deed and general trust law.

Where trustees have such a power, they would normally still rely on the settlor’s guidance, and so it is always advisable to record the settlor's wishes as to how these powers should be exercised. Typically, the settlor will provide the trustees with a "Letter of Wishes" or the trustees would record the settlor's wishes as communicated to them in a "Memorandum of Wishes". The word "Letter" is used rather than  "statement" to make it clear that it not to be binding on the trustees. If the letter is expressed in imperative terms it may be construed to be binding and override the terms of the trust (note however that a statement of wishes, however, drafted, cannot override the terms of a will unless it was executed in accordance with the formalities required for a testamentary disposition (it could form the basis of an application to the Court to rectify a will though).

For the above reason, the letter would normally include words to the effect that the wishes are for the guidance of the trustees and are not intended to bind them. The letter of wishes should be signed and dated and would normally be witnessed but this is not essential.

Pension scheme and "By-pass" trust "nominations"

Financial advisers will generally be familiar with a pension scheme member having to sign a "nomination" or "designation" in relation to payment of death benefits from a pension scheme (normally at the discretion of the scheme trustees or administrators). Regardless of the term used, the words in such a "form" would state that it is not binding (to ensure that the pension scheme remains in a discretionary form for tax reasons); in effect, it would also be a form of letter of wishes.

Settlor's wish as trustee's command?

It is said that the trustees will normally act in accordance with the settlor's wishes unless they find compelling reasons not to do so. It is, however, important to remember that trustees of a discretionary trust should not just blindly follow the settlor's wishes but need to consciously exercise their independent discretion when making decisions, taking account of all the relevant circumstances, including the needs of all the trust beneficiaries. 

And they should ensure they have documentary evidence that this happened should a beneficiary challenge them in Court. If they were to exactly follow the wishes of the settlor (without having some evidence of independently deciding to do so) this could leave them open to a charge that the trust terms were in fact included in the letter of wishes or, worse still, that the trust was a sham.

Avoiding shams

In a very well known case in Jersey, the Rahman case, Abdel Rahman v Chase Bank (C.I.) Trust Company [1991] JLR 103 a trust was overturned as a sham.  This was because, despite a properly executed trust deed and the trustees having been appointed, the trustees merely followed the instructions of the settlor. Slightly more recently in the UK, a trust was held void for a similar reason in Midland Bank v Wyatt [1995] 1 FLR 697.

The crucial test for a sham is whether there was an intention to create a genuine trust in the first place.  If there was an understanding between the settlor and the trustee that, despite the terms of the trust, the trustee would in practice administer it on the instructions of the settlor, effectively treating it as his personal "money box", then there is no trust (as confirmed in Re Esteem Settlement [2003] JLR 188).

Although everything depends on the intention when the trust was created, the way the trust is administered may also be important. So again, a "binding" letter of wishes or the trustees blindly following the settlor's wishes may have very serious consequences.  The effect of a sham is that all the trust funds remain in the estate of the settlor for all (tax and succession) purposes.

Do the beneficiaries have a right to see a letter of wishes?

In many if not most cases trustees would be happy to allow the beneficiaries to see the settlor’s letter of wishes. Indeed, in many cases, the settlor would leave a copy of his letter of wishes with the main trust beneficiaries. But where this is not the case, would the beneficiaries of a discretionary trust be able to demand sight of the letter?

It may be worthwhile at this stage to remind ourselves what rights beneficiaries have as regards seeking disclosure of trust documents.

In English law, the traditional view has been that, first of all, there is a clear line between beneficiaries with a fixed interest (e.g. life tenant or remaindermen) and beneficiaries with only discretionary rights or objects of a mere power. The general view was that beneficiaries with a fixed interest were entitled to the sight of certain trust documents because of their proprietary interest in them whilst potential objects of discretionary powers were not.

There have been numerous cases on this but decisions are not necessarily consistent and there has also been some discussion as to what actually constitutes a trust document. The leading case on this point, Re Londonderry Settlement (1965) Ch 918, distinguished between trust documents relating to trust property and documents which relate to trustees’ exercise of their discretion. The view was that the trustees had to disclose the trust deed, subsequent appointments and trust accounts but did not need to disclose documents relating to the exercise of their discretion, such as agendas for trustees’ meetings, correspondence between the trustees or the trustees and the beneficiaries and minutes of trustees’ meetings.

However, following the  2003 decision by the Judicial Committee of the Privy Council in Schmidt -v- Rosewood Trust Ltd (2003) WLR565 the latest view is that a Court of equity has a general supervisory jurisdiction over trusts and it would be up to the Court to decide whether any particular document should be disclosed where the Court felt it was essential to ensure that the trustees are accountable to the beneficiaries on whose behalf they hold the assets.

Clearly then, even discretionary beneficiaries might also be entitled to the protection of the Court, although the circumstances in which this might happen and the nature of the protection would depend on the Court's discretion.

Interestingly, there have been a couple of cases concerning the disclosure of the settlor's letter of wishes where the Court decided that disclosure should be made, but clearly all will depend on the circumstances.

When faced with a request from a beneficiary for disclosure of a letter of wishes, prudent trustees should protect themselves by obtaining counsel’s opinion.

Dealing with conflicting wishes

As can be imagined, trusts often last a long time (up to 125 years now in England and Wales) and over the years the settlor, if still alive, may change his mind about his wishes. Indeed, it is generally recommended that trustees of a discretionary trust periodically ask the settlor for an up-to-date letter of wishes, given that circumstances change over time, additional beneficiaries may be born and/or the needs of the original beneficiaries change.

What if a settlor has provided the trustees with several letters and they include conflicting wishes?

A recent case

Bermuda is a British Overseas Territory and, although it has its own laws, as far as trusts are concerned these are based in English law and their Supreme Court's judgments may offer persuasive guidance on certain points if they have not been addressed by an English Court. One such case is of interest to us as it concerned conflicting wishes expressed by the settlor.

The case in question is In the Matter of the R Trust [2019] SC (Bda) 36 Civ. It concerned a contested “blessing application” (i.e. an application to the Court to approve a transaction) to appoint assets out of one trust to another trust when faced with conflicting wishes expressed by the late settlor. This judgment also clarifies the extent to which a trustee is obliged to justify its decisions.

The facts

The following is based on the judgement of Hon. Chief Justice Hargun (the Supreme Court of Bermuda) of 3 June 2019 and the excellent commentary thereon provided by Geoff Kertesz and Marek Ejmont of Stewarts.

The Trust in this case, was settled in December 1995, and its original beneficiaries were the settlor's daughter and her issue, a university and “any other charity”. By the time the matter came before the Bermuda Court, the beneficial class had been expanded to include also the settlor and his spouse.

The Trust owned shares in a number of companies, which in turn owned various portfolio investments and a property in the USA (Property), all of which originated directly or indirectly from the settlor. The Court was told that the trustee had always considered that the Trust was a family trust for the benefit of the settlor’s wife and his children.

At the heart of this conflict were two documents: the settlor’s letter of wishes provided to the trustee in 2008 (the Letter of Wishes), and his later will (the Will). Although these documents communicated similar wishes concerning the use and occupation of the Property during the wife's lifetime, they differed as regards whether ownership should remain with the trustee or pass to the wife.

Briefly, the Letter of Wishes provided that the wife should have sole use and occupation of the property during her lifetime and after her death, the property should pass to the daughter.

Conversely, the Will provided that the Property should pass to the wife. Of course, the property was held by the trustees, but the wife claimed that the Will reflected the settlor's later wish, him having changed his mind about his daughter. The trustees appointed the Property to a life interest trust for the wife and the wife challenged this decision.

The wife argued that the trustee was bound to take into account the settlor's wishes expressed in his Will, and if it was going to depart from these, it was under an obligation to explain rationally why it had done so. No such explanation had been provided.

The judgment

The judge found against the wife in relation to both issues.

The judge referred to Lord Walker’s judgment in Pitt v Holt [2013] 2 AC108, which provides that trustees are under no obligation to follow settlor wishes in preference to other relevant considerations. The settlor’s wishes could not displace an independent judgment on the part of the trustees.

The judge also found there was no obligation on trustees to explain specifically why a particular wish of the settlor had not been followed; it was sufficient for them to explain the relevant factors they took into account in coming to the decision and that the decision made was reasonable in the sense that it was a decision which could be made by a reasonable body of trustees.

Assigning greater “weight” to particular wishes

The finding that trustees were not obliged to follow a settlor’s particular wish, in the context of two conflicting sets of wishes, may imply that one set of wishes does not necessarily have greater “weight” over another. This has particular significance for many professional (especially offshore) trustees who often receive updated wishes (in one form or another) from trust settlors following changes in their circumstances or personal relationships with the trust’s beneficiaries.

Although the settlor’s wishes are a relevant consideration for trustees to take into account, they are not the only consideration, particularly when a later set of wishes (as was the case here) plainly negatively affects the interests of certain members of the beneficial class.

Other issues concerning the settlor’s wishes

Interestingly the judge proceeded on the basis that the settlor’s wishes, as expressed in settlor’s Will, were no different than the formal letter of wishes expressed to the trustee in 2008.

This supports the view that letters of wishes do not have to have a defined form.

This case demonstrates the problems caused by conflicting wishes expressed in various sources or forms. There may be an argument to require wishes from the settlor to be expressed directly to the trustee explicitly in that capacity and in a recognisable form.

If all expressions of the settlor’s wishes have equal standing, trustees could potentially be open to a far wider range of disputes where various potential beneficiaries would assert their interpretation of the settlor’s wishes as the most authoritative or preferred.

Conclusions

While we do not have much case law on letters of wishes, the decision in the above case is useful. Most importantly it confirms that trustees should not unthinkingly follow a written letter but guide any decisions by what is best for the beneficiaries as a whole.

The importance for trustees of discretionary trusts of having an up-to-date letter of wishes should be obvious. Trustees of existing trusts should be reminded of this. And settlors should be reminded to update their letters of wishes. Given that no special formalities are necessary, it is easily done even during a pandemic.