The relevance of settlor's wishes from time to time in a trust context

This article features in Issue Two of our Private Wealth Perspectives Newsletter.

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In private wealth practice involving discretionary trust structures, letters of wishes are a familiar device for settlors to communicate their non-binding requests to trustees to take certain matters into account when exercising their discretionary powers.

Professional trustees are usually very comfortable in knowing the status to afford letters of wishes and their inherent strengths and limitations. But recent disquiet has arisen in the trust industry about the status to be afforded to the changing wishes of settlors, post-settlement of the trust.

This article will explore settlor's wishes, the particular problem areas and how to grapple with changing settlor wishes as a trustee. 

Letters of wishes in relation to the exercise of fiduciary powers

It is widely accepted that the three major duties and restrictions applicable to the exercise of fiduciary powers are:

• The exercise of a fiduciary power must be within the express or implied terms of the power (the scope of the power rule);
• The trustee must give adequate deliberation as to whether and how s/he should exercise the power; and
• The use of the power, although within scope, must for a proper purpose, i.e. the purpose or one of the purposes for which it was conferred (the proper purpose rule). 

(Pitt v Holt [2013 UKSC 26; Grand View v Wong [2022] UKPC 47).

This article will focus on points two and three as they relate to settlor wishes.

Letters of wishes – adequate deliberation

At the time settlors establish trust structures, they are often divesting themselves of the vast majority of their family wealth and sensibly take the opportunity at that time to convey their wishes to the trustees as to certain matters for the trustee to take into account when exercising their discretionary powers.

Usually the wishes relate to how the trustees might exercise their dispositive powers (i.e. to make distributions of trust assets to beneficiaries), but they can include wishes as to the exercise of investment powers or administrative powers.

Providing a letter of wishes at the outset will often provide settlors with a degree of comfort in having communicated their vision and philosophy in relation to their private wealth to the trustees. However, letters of wishes are entirely non-binding on trustees, and settlors will be advised of this when establishing the relevant trust structure.

The relationship between settlor's wishes and trustees' decision-making autonomy has led to a number of judicial decisions over the years as to how exactly trustees should treat letters of wishes in their decision-making process.

It is now clear that a letter of wishes, made contemporaneously with the settlement of the trust, should be taken into account by a trustee during a trustee's decision-making process. It is a relevant consideration: "The settlor's wishes are always a material consideration in the exercise of fiduciary discretions" (Pitt v Holt [2013] UKSC 26).

However, this is not the same as saying that the trustee must follow or adhere to the settlor's wishes in making their decision; it is just one of (usually) many relevant considerations to be taken into account and the trustee will decide the weight to give to each of those considerations in the decision-making process.

For example, the trustee must also consider the wishes and the needs of the beneficiaries when making decisions. This is self-evident given that trustees have a duty to act in the interests of the beneficiaries as whole but, once again, any wishes expressed by the beneficiaries are non-binding.

If, in exercising a fiduciary power, the trustee fails to take a relevant consideration into account, such as the wishes of the settlor made contemporaneously with the settlement of the trust, then that decision could be successfully impugned as in contravention of the "adequate deliberation rule", a key tenet of which is that trustees have a duty to take relevant, and only relevant, considerations into account when exercising fiduciary powers.

During the lifetime of the trust, it is common for settlors to update their wishes and communicate those updated wishes to the trustees of the trust. In decision-making, a trustee should likewise take into account those later wishes of the settlor and determine the weight to be attributed to those later wishes, alongside all other relevant considerations.

Often, the settlor's wishes will be given considerable weight but each case will depend on its facts and certainly the trustee should not slavishly follow the settlor's wishes without independent interrogation as to whether that is appropriate bearing in mind all other relevant considerations.

It is prudent for trustees to minute their fiduciary decisions carefully, traversing the factors that they have taken into account (which will include the settlor's wishes) and their reasons for coming to the decision they have.

Letter of wishes – proper purpose

Letters of wishes may also prove pivotal in determining the proper purpose of a power, which is important because it is the duty of the fiduciary to exercise fiduciary powers for a proper purpose, i.e. a purpose for which the power was conferred.

The proper purpose rule has been under scrutiny in recent years due to the Privy Council decision in Grand View v Wong [2022] UKPC 47. The proper purpose rule "involves identifying the purpose for which the power has been exercised and asking whether such purpose is a purpose for which the power has been given" (Wong, paragraph [55]).

The purpose for which the power was given is to be objectively determined as at the date of the instrument conferring the power. In the case of a power contained in a discretionary trust settlement, it will usually be a question of objectively determining the intention of the settlor at the time the trust was settled.

Discretionary trust instruments themselves will rarely contain an express statement of the purposes. But, as the Privy Council in Wong made plain, substantially contemporaneous documents that are intended to be read with the trust instrument, such as a letter of wishes, will be admissible in the determination of the proper purpose of a fiduciary power.

However, Wong made plain that later (i.e. not "substantially contemporaneous") wishes of the settlor are not admissible in determining the purpose of fiduciary powers, which is to be determined as at the date of the instrument conferring the power due to the "need for certainty" [63].

This engendered a dramatic outcome in Wong. There had been no letter of wishes at the outset, but the Privy Council concluded that the natural reading of the relevant trust deed demonstrated that it established a family trust, for the benefit of the direct descendants of the settlors. After the settlement of this family trust, the settlors' intentions changed for explicable reasons, principally that there was no longer any need for it since their descendants would now inherit significant wealth upon the settlors' deaths. Accordingly, the trustee of the family trust determined that they would add the trustee of a purpose trust (also settled by the settlors) as a beneficiary, exclude all of the existing family objects and transfer the assets from the family trust to the trustee of the purpose trust. This was within the scope of the power to add or exclude beneficiaries from the beneficial class, which was a widely drafted power.

However, the Privy Council held that the power had been exercised for an improper purpose. This was because the purpose for which the power of addition and exclusion was conferred at the date of settlement was to further the interests of the family beneficiaries, but it was not for their benefit that it was exercised in Wong; in fact, it was to deprive them of any possibility of benefitting under the family trust.

One can clearly see from Wong the limitation of later wishes in delineating the proper purpose of a power - they are not admissible in determining the proper purpose of a power granted by the settlor at the outset. The fact that the settlors' intentions had clearly changed, for explicable reasons, in Wong, was insufficient to displace the proper purpose of the power as at the date of the settlement.

In practice, however, the exercise of a fiduciary power will not usually offend the proper purpose rule unless the settlor's wishes have radically changed from their wishes at the time of settlement. Nonetheless, consideration should always be given by trustees as to whether the purpose for which they are exercising a power is for the purpose (or one of the purposes) for which it has been given.

Where they are making a decision which is consistent with later wishes of a settlor, the need to interrogate the proper purpose as at the date the power was conferred is all the more acute.

Conclusion

Letters of wishes are standard in the trusts context, but notwithstanding that they are famously non-binding, this does not prevent them from being key to the trust framework in a number of respects. The settlor's wishes are often a constant companion to the trustee in the administration of a modern family trust.

For trustees, they represent a relevant factor to be taken into account when making fiduciary decisions to which the letters of wishes pertain. Therefore, they must be given appropriate weight by trustees in their decision-making. This, in itself, can be a difficult balancing act and requires an acute understanding by the trustee of the nuances of the structure, the background to the settlement of the trust and the needs and interests of the beneficial class, amongst other things.

Additionally, there is the anchoring of the proper purpose of the trust powers in the intentions of the settlor as at the date the trust was settled; this means that trustees need to understand the raison d'être for the settlement and the powers conferred by it, which can often be best understood by examining a letter of wishes provided contemporaneously with the trust settlement. Successor trustees, in particular, need to work hard to understand the proper purpose of the trust settlement, given that they will have had no involvement in the structuring rationale at the outset.

As for subsequent letters of wishes, communicated by the settlor after settlement of the trust and the granting of the trust powers thereby, trustees have to grapple with the fact that they are a relevant consideration in their decision-making while simultaneously being irrelevant to determining the purpose of the power they are exercising. This can present a conundrum for trustees, particularly where the wishes have changed dramatically in the interim.

At every juncture, the trustee needs to manage settlor and beneficiary expectations as to letters of wishes and their role in decision-making and in shaping the proper purpose as at the stage of settlement. If there is a question mark over whether the exercise of a power is within the purpose(s) for which it was conferred or as to the weight to be afforded to settlor wishes in trustee decision-making, it is important for a trustee to take advice early and, if necessary, make an application to the Court for directions.

From the viewpoint of settlors and beneficiaries, if there is doubt as to whether trustees are affording letters of wishes appropriate weight (for example, a decision is made which ostensibly runs contrary to the settlor's express wishes without obvious good reason) or if the trustees appear to be exercising a power contrary to the purpose for which the power was conferred by the settlor in the first place, it is every bit as important for them to take legal advice as to their options. A dialogue with the trustee can often help and, if matters do not resolve, then it may be possible to challenge the trustee's decision/exercise of the trustee's power.

One thing is clear: gone is the traditional notion that the settlor (in their capacity as such) has no ongoing part to play in the trust once they have settled the assets on trust. The reality is that the powers conferred by the settlement are forever imbued with the settlor's intentions at that time, and the settlor's wishes will continue to be a relevant consideration for the trustee. The trustee must, therefore, get used to engaging with the settlor's wishes throughout the lifetime of the trust.