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This essay is the first in a three-part mini-series which will consider: the status of a settlor’s letter of wishes, including the extent to which the trustee is bound by the settlor’s wishes and the circumstances in which a trustee can (or should) depart from the settlor’s wishes (part one); the extent to which it is possible to amend or replace a letter of wishes and the effect of the same (part two); and the rights of beneficiaries to access the settlor’s letter of wishes (part three).
Part one: The status of letters of wishes
A letter of wishes is not a pre-requisite for the establishment of a trust, but it is nevertheless to be encouraged in relation to discretionary trusts as a mechanism by which the settlor can guide the trustee in relation to his intentions and the exercise of the trustee’s discretion, and by which the settlor can retain a degree of flexibility in relation to how the trust is to operate, updating the letter of wishes throughout his lifetime without having to amend the trust deed. It is little wonder, then, that the use of letters of wishes in relation to discretionary trusts is widespread.[1] Indeed, in an important article on the subject, the position was described thus: ‘In the modern international trust context, the letter of wishes is a near-ubiquitous companion to the trust instrument.’[2]
The settlor’s letter of wishes may address issues such as the investment approach to be taken in respect of trust assets, the factors to be taken into account when making distributions to beneficiaries, and the person whose wishes the trustee should ascertain following the death of the settlor (often the settlor’s widow). It may also include relevant background in relation to the family, including the beneficiaries and their respective circumstances, and may ask that the trustee consult the settlor during his lifetime before making distributions.
One well-respected practitioner text[3] has attempted to categorise letters of wishes as follows: (i) those that are “legally binding” (i.e. they must be followed); (ii) those that are “legally significant” (i.e. they must be taken into account but need not be followed); and (iii) those that are “morally binding” (i.e. it is up to the trustee whether to take them into account or not). The first category – those that are described as “legally binding” letters of wishes – are not really letters of wishes as properly so-called; they are trust documents that delineate the trustee’s powers and obligations. Whilst it may be possible for a settlor to provide a “morally binding” letter of wishes so as to fall within the third category – perhaps by providing in the trust deed that the trustee shall be free to consider or entirely disregard any wishes expressed by the settlor as the trustee sees fit – it is difficult to see why a settlor would wish to do this. In the authors’ view, therefore, it is only the second category – “legally significant” letters of wishes – that reflect letters of wishes as they are generally understood in the authorities.
A relevant consideration
A trustee, when exercising any power in relation to a trust, must take into account all relevant considerations and must disregard any irrelevant considerations.[4] A settlor’s wishes are a relevant consideration for these purposes. Per Lord Walker in Pitt v Holt:[5] ‘The settlor’s wishes are always a material consideration in the exercise of fiduciary discretions.’
In the 2014 case of Stiftung Salle Modulable v Butterfield Trust (Bermuda) Limited,[6] the Supreme Court of Bermuda found that the trustee had ‘no legal obligation to have regard to the Settlor’s wishes’, directly contradicting the English Supreme Court in Pitt v Holt. It is perhaps of note that Pitt v Holt was not cited in that case. More recently, the Bermuda Court, has found that the settlor’s wishes are a ‘relevant consideration for the trustees to consider and take into account with other considerations’.[7] This latter expression of the position is consistent with the position adopted in England and Wales and in other offshore jurisdictions and is, the authors would suggest, the correct approach.
Although a trustee is bound to consider the settlor’s wishes – whether expressed in a letter of wishes or otherwise[8] –that does not mean that it is bound to follow them. On the contrary, the trustee is obliged to make its own decision; it cannot fetter its discretion by blindly following the wishes of the settlor. [9]
As a practical matter, trustees often do follow the guidance set out in letters of wishes, although this is not always the case. In In re Rabaiotti’s Settlements,[10] the Royal Court of Jersey described a letter of wishes as ‘an informal document which the trustees are free to ignore. It is merely an expression of the settlor’s wishes.’[11] In the recent Bermuda case of In the matter of the R Trust,[12] Chief Justice Hargun noted that: ‘the trustees were under no obligation to follow such wishes in preference to other relevant considerations. Furthermore, the settlor’s wishes could not displace all independent judgment on the part of the trustees.’ The case law therefore suggests that the letter of wishes is just one factor for the trustee to take into account, which must be weighed in the balance with all other relevant factors before the trustee decides how to exercise its discretion. That said, there have been cases in which the settlor’s wishes appear to have been the only consideration taken into account.[13]
In a recent Bermuda case concerning an application for the Court’s blessing in respect of a momentous decision under Public Trustee v Cooper,[14] for example, the Court found that it was unreasonable to criticise the trustee for failing to adhere to the letter of wishes in circumstances where (a) the beneficiaries had agreed a division of trust assets between themselves, following the death of the settlor, and (b) 11 years had passed between the signing of the letter of wishes and the beneficiaries’ settlement agreement. Indeed, the Court found that the trustee was entitled to give precedence to the settlement agreement reached between the beneficiaries over the letter of wishes.[15]
Departing from a letter of wishes
In what circumstances, then, can (or should) a trustee depart from a settlor’s letter of wishes? The trustee is subject to an overarching obligation to administer the trust for the benefit of the beneficiaries, both present and future.[16] It must have this duty in mind when deciding whether to adhere to or depart from the settlor’s letter of wishes. If the trustee forms the good faith view – having taken into account all relevant considerations and disregarded all irrelevant considerations – that it would be in the best interests of the beneficiaries to depart from the letter of wishes then, provided its proposed course of action is compliant with the underlying trust deed (as distinct from the letter of wishes), that is what the trustee should do. An example of the circumstances in which such a course might be necessary would be to depart from an investment strategy devised by the settlor which the trustee believes will cause the trust assets to be devalued to the detriment of the beneficiaries.
In In the matter of the R Trust,[17] the Bermuda Court was faced with the contention that the settlor had expressed two contradictory wishes in relation to the disposition of trust property, the first expressed in a letter of wishes written in 2008 and the second expressed in a will from 2011. In the letter of wishes, the settlor expressed the desire that a property in the United States be available to his wife for life and thereafter be given to his daughter absolutely; in the will, he purported to leave the property to his wife absolutely, with the expressed desire that she should make a will to leave it to his daughter on her death.[18] The purported gift in the will failed because the property was an asset of the trust and so could not be disposed of by the settlor, but the wife argued that the will nevertheless represented the settlor’s most up-to-date wishes in respect of the property at the time of his death in 2013.
The Court found that, although the mechanisms in the letter of wishes and the will were different, the settlor was seeking to achieve the same result in both, namely that the wife would have the use of the property for her lifetime and the daughter would have it thereafter. It therefore considered that the trustee, in seeking the Court’s blessing for an arrangement whereby the property was to be held under a new trust for the benefit of the wife for her lifetime and thereafter for the benefit of the daughter, was acting in accordance with the settlor’s wishes as expressed in both the letter of wishes and in the will.[19] Having analysed the settlor’s wishes, the Court also went on to consider whether the proposed arrangement was in the interests of the beneficiaries and the administration of the trust, holding:
‘the distribution, leaving aside the wishes of the Settlor, is in any event in the best interests of the Trust as a whole. In this regard the Trustee does not consider that it is in the best interests of the Trust for the Daughter and her issue not to benefit at all from the Trust’s principal remaining asset and instead leave open the possibility for the Wife’s heirs (who are not Trust beneficiaries) to have the principal benefit. In the circumstances, the Court has no hesitation in concluding that the decision of the Trustee is one which a reasonable body of trustees could have made.’[20]
Ultimately, therefore, although the Court found that the trustee had acted in accordance with the settlor’s wishes, the Court gave its blessing to the proposed arrangement not because of the trustee’s compliance with the settlor’s wishes but because of the finding that the trustee was acting in the best interests of the beneficiaries and the trust as a whole. That will always be the test, whether the settlor has provided guidance through a letter of wishes or not. The trustee cannot fetter its discretion and must not unthinkingly follow instructions or guidance from anyone, not even the settlor.[21]
[1] This was observed by Briggs J (as he then was) in the leading English case of Breakspear v Ackland [2009] Ch 32 at [3].
[2] Moverley Smith, S. and Holden, A. (2014) Letters of wishes and the ongoing role of the settlor. Trusts & Trustees. 20 (7), 712–724 at 713.
[3] Matthews, P. et al., (2022) Underhill and Hayton: Law of Trusts and Trustees, 20th ed. London, LexisNexis Butterworths, at §§ 4.10-4.14
[4] In re Hastings-Bass, decd [1975] Ch 25; Pitt v Holt [2013] 2 AC 108. See also Bermuda’s Trustee Act 1975 s. 47A, which enables the Court to set aside the exercise of a fiduciary power if, inter alia, the trustee failed to take into account one or more relevant considerations or took into account one or more irrelevant considerations.
[5] Pitt v Holt [2013] 2 AC 108 at [66]
[6] Stiftung Salle Modulable v Butterfield Trust (Bermuda) Limited BM 2014 SC 12 at [315]
[7] In the matter of the R Trust [2019] Bda LR 39 at [36], citing Pitt v Holt.
[8] See, for example, In the matter of the R Trust, ibid., in which the settlor’s wishes were expressed, inter alia, in a will, and Abacus Trust Co. (Isle of Man) v Barr [2003] EWHC 114 (Ch), where they were expressed orally.
[9] Matthews, P., et al., op. cit. (n 3) at § 4.10
[10] In re Rabaiotti’s Settlements [2000] WTLR 953 at 968
[11] The authors would disagree that the trustees are free to “ignore” the letter of wishes, insofar as this might tend to suggest that they do not even have to consider it, for the reasons set out herein.
[12] Op. cit. (n 7) at [36]
[13] For example, Abacus Trust Co. (Isle of Man) v Barr [2003] EWHC 114 (Ch). See also Lynton, T., Le Poidevin, N., and Brightwell, J., (2020) Lewin on Trusts, (20th ed.). London, Sweet & Maxwell, § 21-066
[14] Public Trustee v Cooper [2001] WTLR 901
[15] In the matter of the P Trusts [2023] SC (Bda) 31 Civ at [87]
[16] Haley, M., and McMurtry, L., (2020) Equity and Trusts: Textbook Series, 6th ed. London, Sweet & Maxwell, § 13-001
[17] Op. cit. (n 7)
[18] It is relevant to note that: (i) the daughter was the settlor’s only natural child; (ii) the wife was the settlor’s third wife; (iii) the wife had four children from a previous marriage.
[19] Op. cit. (n 7) at [69].
[20] Op. cit. (n7) at [70]-[71].
[21] Matthews, P., et al., op. cit. (n 3) at § 4.10
Bermuda