What a letter of wishes is
A letter of wishes, sometimes called a memorandum of wishes or a statement of wishes, is a document written by the settlor of a discretionary trust and addressed to the trustees. It explains how the settlor hopes the trustees will exercise their discretion. It sits alongside the trust deed and is usually much shorter and less formal.
The deed of a discretionary trust is deliberately wide. It may name a broad class of beneficiaries and give the trustees power to pay income or capital to any of them at any time. That width gives flexibility, but on its own it tells the trustees very little about what the settlor actually wanted. The letter of wishes fills that gap. It might say that the settlor's spouse should be provided for first during their lifetime, that grandchildren should be helped with education, that the family business should be kept if possible, or that a particular beneficiary should receive nothing until they reach a certain age.
Letters can be written at the time the trust is created and updated over the years. A settlor who has a falling out with a child, or welcomes a new grandchild, may write a fresh letter replacing the old one.
Why it is not binding
A letter of wishes is not binding on the trustees. This is its defining feature and the reason it exists. If the settlor's instructions were binding, the trust would not really be discretionary, and in some circumstances the arrangement could be treated as a sham, with the settlor still in control of the assets. That can undermine the asset protection and tax planning the trust was meant to achieve.
So the letter is drafted as an expression of hopes. Well-drafted letters use language such as "I would like the trustees to consider" or "it is my wish that", and avoid words like "must" or "shall". Many state expressly that the settlor understands the trustees are not bound.
Not binding does not mean irrelevant. Trustees are generally expected to take the settlor's wishes into account as a relevant consideration when exercising their discretion. A trustee who ignored a letter of wishes entirely might be criticised for failing to consider all relevant matters. A trustee who followed it blindly, without thinking about the beneficiaries' circumstances, might be criticised for fettering their discretion. The trustee's job is to give the wishes proper weight and then reach their own decision.
How trustees use it in practice
In day-to-day trust administration, the letter of wishes is one of the first documents a trustee reaches for when a decision comes up. Faced with a request from a beneficiary for funds to start a business, the trustee will read the letter to see whether the settlor said anything about business ventures, about this beneficiary in particular, or about the balance between capital growth and support for the family.
Typical uses include:
- Deciding priorities between generations, for example whether to preserve capital for grandchildren or support the settlor's children now.
- Deciding how to treat beneficiaries who are in difficulty, including those with addiction problems or in the middle of divorce proceedings.
- Deciding what to do with a family business or a significant property.
- Deciding whether to make regular income distributions or only occasional capital payments.
- Deciding which charitable causes, if any, the trust should support.
When the trustees record a distribution decision, it is good practice for the resolution to note that the letter of wishes was considered, even if the decision departs from it. A short note of why the trustees decided differently, where they have done so, is useful protection if the decision is later questioned.
What makes a useful letter
From the trustee's side of the table, the most useful letters share some features. They explain the settlor's values and the reasons behind each wish, so trustees can apply the spirit of the letter to situations the settlor did not foresee. They are specific where specificity helps, for example naming a family property the settlor hopes will be kept. They are realistic about the size of the fund and the number of beneficiaries.
The least useful letters are either so vague that they add nothing to the deed, or so prescriptive that they read like binding instructions. A letter that sets out a detailed payment schedule for each beneficiary, with exact amounts and dates, can cause problems by suggesting the trustees have no real discretion.
Letters should be dated, signed and kept up to date. A letter written thirty years ago, mentioning beneficiaries who have since died and ignoring several grandchildren, is of limited help. Settlors should review their letter when family circumstances change, and trustees should prompt them to do so. Specialist lawyers will advise on drafting.
Letters of wishes and onboarding
When a bank or payment provider onboards a trust, its focus is on the deed, the parties and the source of wealth. The letter of wishes is not usually a required document, and many providers never ask for it.
There are situations where it can come up. A provider trying to understand the expected pattern of payments may ask how the trustees intend to use the fund. A trust that expects to make regular distributions to several beneficiaries in different countries will have a very different activity profile from one that will accumulate for decades. The trustees can answer that question from their own knowledge, informed by the letter, without handing over the letter itself.
A provider may also ask about the letter when there is doubt about who really controls the trust. If the settlor appears to be directing payments, a provider may want to understand whether the trustees are exercising genuine discretion. In that context, the trustees' records of their own decision-making are more relevant than the letter, but the existence of a letter and its non-binding character may form part of the explanation.
Under Canadian rules, providers must identify the trustees, settlor, known beneficiaries and protector, and beneficiaries of discretionary trusts when they are named or receive distributions. A beneficiary mentioned in a letter of wishes, but not named in the deed, will need to be identified once they receive a distribution.
Confidentiality
Letters of wishes often contain sensitive personal material: opinions about family members, health information, concerns about marriages, or the reasons a particular person is to be left out. Settlors usually expect the letter to remain private between them and the trustees.
The extent to which beneficiaries can see a letter of wishes depends on the governing law and the circumstances. Courts in several common law jurisdictions have generally treated letters of wishes as documents the trustees are not obliged to disclose to beneficiaries as of right, while retaining the court's power to order disclosure where needed. The position is not uniform, and trustees faced with a disclosure request should take legal advice.
Practical steps to protect confidentiality include:
- Keeping the letter in a separate, restricted file, not mixed with general trust correspondence.
- Not sending the letter to banks, providers or advisers unless there is a specific need.
- Where a provider asks a question the letter would answer, giving a summary in the trustees' own words.
- Marking the letter as confidential and addressed only to the trustees.
When trustees change
A letter of wishes is addressed to the trustees from time to time, not to a particular firm. When a trustee retires and a new one is appointed, the letter should be passed on with the rest of the trust records. The incoming trustee should read it as part of taking on the trust, along with the deed and the history of past decisions.
Sometimes a change of trustee is a good moment for the settlor, if still living, to review the letter. A new trustee may ask questions the old one never thought to ask. For what changes on the banking side when trustees change, see changing trustees and banking.
After the settlor dies
Letters of wishes take on extra weight once the settlor has died, because the trustees can no longer ask what was meant. Ambiguous wording that was harmless during the settlor's lifetime can become the source of family tension. Trustees in this position should read the letter alongside everything else they know of the settlor's intentions, including earlier letters, file notes of conversations, and the general pattern of past distributions.
Beneficiaries sometimes try to treat the letter as a will, insisting that the trustees carry out each wish to the letter. The trustees should explain, politely and firmly, that the letter guides their discretion but does not replace it. Their decisions, and the reasons for them, should continue to be recorded carefully.
General information only
This article is general information about letters of wishes. It is not legal or tax advice. Their effect, and the rules on disclosure, depend on the governing law of the trust, and settlors and trustees should consult their own lawyers on drafting and use.
CCYFX acts on the instructions of trustees and authorised signatories, and keeps onboarding focused on what is needed. You can read more on our compliance page.
