LETTERS OF WISHES
| Citation | (2009) 21 SAcLJ 193 |
| Published date | 01 December 2009 |
| Date | 01 December 2009 |
This article analyses the different categories of letters of wishes, their different implications on the trustee’s duty, the comparative judicial approaches to the recognition and treatment of letters of wishes, as well as the offshore statutory models governing the trustee’s duty of disclosure. This article argues that, whilst the law is less than certain, a resort to statutory reform is unnecessary. It is argued that the current position on letters of wishes, post-Rosewood, is that of a judicial discretion based on the court’s inherent duty to supervise the trust, shifting the emphasis in the law to the trustee’s accountability. This shift to accountability is consistent with the obligational theory of trust. It is argued that this does not represent a complete shift to accountability. Instead, the court must still undertake a balancing exercise — between the trustee’s duty to account that entitles the beneficiaries to inspect trust documents and records on request, and the trustee’s duty to act in the best interests of the beneficiaries that requires the trustee to reject a request for disclosure in appropriate circumstances — in deciding whether the trustee has disclosure obligations on a letter of wishes towards the beneficiaries.
1 A letter of wishes,1 a separate document from a trust instrument, is commonly given by a settlor to the trustees of his will to provide guidance as to how he would like the trustees to exercise their powers.2 A letter of wishes thus represents a less direct means by which a
settlor controls the devolution of trust property. Today, besides the use of letters of wishes in the context of pension trusts,3 they are also commonly used in inter vivo trusts, facilitating the offloading of assets by the settlors from the testamentary estate, and minimising tax liability.
2 Generally, there are three categories of letters of wishes. The first is a legally binding letter, a mandatory document to be read alongside the trust instrument. The second is a letter which is designed to have only legal significance. The third is a letter which is only morally binding, and thus an action cannot be brought against the trustees for failing to act in accordance with the letter.4 The categorisation of a letter of wishes is important — the trustee’s duty and the availability of remedies to the beneficiaries differ in each category. A trustee can differentiate between a legally significant5 letter of wishes, and a morally binding one,6 by the specific way in which each is drafted. For example, the latter would contain words to the effect that the trustee is not under any legal obligation to consider the letter, and so would not be held accountable in relation to the taking into account of, or for failing to take into account, such wishes.
3 It has been observed that some legal advisers have recommended the use of a memorandum of wishes, over a letter of wishes.7 This is based on the rationale that since a settlor does not sign the memorandum, it removes the risk of it being held to impose a trust
and it being part of the trust instrument — a risk which remains with the use of a letter of wishes.8 However, it is suggested that the use of a memorandum of wishes does not achieve any reduction in risk — its significance is the same as a letter of wishes. It serves the same purpose as a letter of wishes, such as to provide information on a settlor’s intentions. It is these intentions which determine the trusts on which the assets are held.9
4 The core element of a trust is the right of a beneficiary to enforce the trusteeship.10 In Armitage v Nurse, Millett LJ held that “if the beneficiaries have no rights enforceable against the trustees, there are no trusts”.11 The beneficiary’s right of enforcement is only effective and meaningful if the beneficiary is aware of his status as a beneficiary and has access to the required information to render the trustees accountable for their actions.12 Only if the beneficiary is so informed can any obligation of executors and trustees to provide trust information on request have any substance. A trust must be both visible to the beneficiaries and enforceable by them.13
5 A duty at the heart of the trust relationship is the trustee’s duty to inform a beneficiary of his entitlement. As such, every beneficiary is entitled to see the trust accounts.14 However, this duty is only limited to providing information duly requested by a qualified applicant — a trustee generally has no duty to volunteer information.15 A beneficiary’s right is confined to information which concerns him.
6 The impact of a letter of wishes on the trustee’s duty to inform a beneficiary of his entitlement, and the duty of disclosure, depends on whether the letter is regarded as a mandatory document to be read alongside the trust instrument, or a document which is intended to have only legal significance, or a document which is only morally binding.
7 Exceptionally, a settlor’s intention may be for the trustee to accept a letter of wishes as a legally binding document which overrides any contrary terms contained in the trust instrument.16 Some factors which would persuade the court that this was so intended include the use of mandatory language, the degree of precision with which the letter of wishes is couched, the length and complexity of the trust instrument in contrast to the simplicity of the letter of wishes. It is suggested that in this context since a beneficiary has a right to see the formal trust instrument, he also has a right to see the informal letter of wishes, since the legally binding terms of the trust arise via the incorporation of both documents.17 In addition, if the trust instrument or letter of wishes stipulates that any term is to be kept secret from the beneficiary, this would be rejected by the court as being repugnant to the fundamental concept of trust that a beneficiary must have a meaningful right to make the trustee properly account for his trusteeship.18
8 The most common situation is that a settlor intends that a letter of wishes be only of legal significance19— that of the second category — in revealing the purposes for the extensive range of powers and discretions conferred on the trustees.20 Such a letter is not legally binding on the trustee. The trustee does not have to follow exactly the wishes set out in the letter. Instead, it is legally significant in that it provides some guidance for a trustee (and any successor or replacement trustees), which the trustee has to consider, in exercising his powers and discretions. It also clarifies the purposes and expectations which the settlor had in mind when he granted the broad powers and discretions
to the trustee.21 Once a trustee has considered the guidance provided, he is free to exercise his independent judgment to accord with changing circumstances. The trustee would not be held accountable for exercising his powers and discretions in a particular manner as long as he has considered the guidance provided.
9 Moreover, since the disclosure of information to beneficiaries is now contingent on the core accountability of the trustees to them,22 such a legally significant letter is a crucial document which the beneficiaries ought to be able to inspect, together with the trust instrument, so that the beneficiaries are in a meaningful position to demand that the trustees account for the proper exercise of their discretions. Only if the beneficiaries can ascertain the purposes and expectations of the settlor (instead of relying on the trustees’ assertions which cannot be proved one way or the other), can they possibly allege that the trustees failed to properly exercise their discretion in furthering these purposes and expectations, but instead did so arbitrarily, or took into account irrelevant factors, or failed to take into account relevant factors.23
10 A settlor who is determined to ensure that his letter of wishes remains confidential can make it simply morally binding24 without the attendant legal significance, so that it need not be disclosed even if the beneficiary brings a legal action against the trustee. Unlike a legally significant letter of wishes, there are no legal obligations imposed on a trustee to consider a morally binding letter. A trustee would not be accountable with regard to his taking into account such wishes. As long as a morally binding letter is not a sham25 inserted by the trustee without the settlor’s consent or without the settlor’s mind being directed to it to appreciate and approve of it,26 it is suggested that a court should give effect to this expression of the settlor’s intention in creating a mere morally binding letter.
11 The majority of letters of wishes belong to the second category — those intended to have only legal significance. One significant uncertainty which the courts have had to grapple with when dealing with legally significant letters of wishes is whether settlors can expressly or impliedly provide that such letters not be disclosed to anyone, but instead kept secret and confidential. In turn, this depends on whether the beneficiaries have a right to have access to the letter of wishes, and use it to determine the settlor’s purposes and to check whether the trustees are exercising their powers properly in order to achieve these purposes. This issue commonly arises where it is believed that a trust is not being properly administered, and a beneficiary intends to take steps to compel its proper administration and to preserve his entitlement under the trust.27 In such a situation, the trustee’s duty to account and provide information, and the beneficiary’s ability to demand its disclosure and the discharge of such duty, become crucial.28
12 The law on this is unclear at best. This is due to...
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