Letters of wishes in discretionary trusts

• Published date: 05 August 2021
• Subject Matter: Corporate/Commercial Law, Trusts
• Law Firm: Timothy Loh
• Author: Mr Timothy Loh and Gavin Cumming

In a discretionary trust, ownership and control of the settled assets is necessarily given to the trustee by the person transferring the assets into the trust. The transfer of ownership and control to the trustee gives the trustee unfettered discretion to deal with those assets subject only to the terms of the trust. The transfer may serve different purposes, including for example, the desire to place those assets beyond the reach of the creditors of the transferor.

The ceding of ownership and control is scary for settlors and a common tool to address the fear over the loss of the assets is the letter of wishes.

What is a Letter of Wishes?

A letter of wishes expresses the wishes of a settlor as to what the settlor wants to the trustee to do in relation to particular matters which arise from time to time in the life of the trust. By a letter of wishes, the settlor is able to provide both long-term and short-term guidance to a trustee. Such guidance may, for example, relate to how the trustees are to exercise their discretion in relation to the management of the trust assets and how the trustees are to exercise their discretion in relation to decisions as to which of the beneficiaries should receive a distribution from the trust assets, when such distribution should be made and how much such distribution should be.

Can a Letter of Wishes be Updated?

A letter of wishes may be updated from time to time with little formality. Thus, a letter of wishes enables the settlor to make changes to the trust arrangements from time to time with relative ease and without the procedural formality required to amend a trust deed.

Is a Letter of Wishes Legally Binding on the Trustee? Can a Letter of Wishes be Ignored?

A letter of wishes imposes no legal obligation on the trustee to follow them. However, the trustee needs to take the letter of wishes into account in exercising its powers as a trustee and the trustee is entitled to follow the letter of wishes if it is in accordance with the trustee's duties. Very often - sometimes always - a trustee will follow the letter of wishes.

Why Is it Not Possible for a Letter of Wishes to Bind the Trustee?

Under Hong Kong law, a trustee must apply his mind to the exercise of any power or discretion. The trustee must not act merely under the dictation or...