Settlors of long-term trusts often grant the trustees broad discretion over distributions, relying on the trustees’ judgment to make decisions based on evolving facts and circumstances. Many settlors may be concerned that trustees won’t fully share or understand their values or particular outlooks on financial and familial issues. Given these concerns, settlors are increasingly expressing their wishes in separate, non-binding written documents called “letters of wishes” (also commonly known as “statements of intent” or “family values statements”).1

 

Driving the Trend

The increasing use of letters of wishes may be attributable to a number of factors: 

 

The rush in 2011 and 2012 to create new trusts to take advantage of a high gift tax exemption amount that was scheduled to expire on Dec. 31, 2012.2 Many settlors wanted to ensure that the trustees would understand their intentions in a manner that may not be fully conveyed in the trust instrument itself.

A proliferation of multigenerational or perpetual trusts. While settlors often designate close friends or relatives as the initial trustees, successor trustees may not have known the settlors well, if at all. This lack of familiarity with the settlor and circumstances in which the trust was established will only worsen over time. 

A cultural shift, as more “baby boomers” fund trusts and opt for higher levels of expertise to assist future generations.

 • Increased globalization. The growth of multinational families and advisors fluent in cross-border issues is also a factor. For years, separate letters of wishes have been routinely included with non-U.S. trusts. In England and the Commonwealth jurisdictions, letters of wishes are widely used as supplements to both wills and lifetime trusts because, as one British solicitor specializing in trusts and estates said, “practitioners are often hesitant about unduly fettering a trustee’s discretion in the trust document.” In contrast, Latin America tends to fall somewhere in the middle of the continuum, as letters of wishes used there usually only accompany multigenerational trusts.3   

 

Settlors’ Perspective 

While settlors often give trustees broad discretion over distribution decisions, some worry that tax-driven standards commonly used in the United States (for example, directing trustees to provide for the “health, support, maintenance and education” of beneficiaries) fail to convey the settlors’ unique values and concerns. After all, one settlor’s idea of “education” may be a Ph.D., while another’s may be yoga classes taken purely for health or self-discovery. Even a close friend serving as trustee might not grasp the nuances of what a parent/settlor means when she asks that trust funds enable the children to continue living in “the style to which they have grown accustomed.” Does that mean a new luxury car every two years or a pre-owned one every 10? 

Letters of wishes can provide insight without becoming part of mandatory trust language. Some letters of wishes run to 20 pages and sound like contracts; others read like intimate family messages. They can be written when the trust is created or, as often happens, long after. Some last decades; others are repeatedly amended or supplanted. Some settlors have their lawyers do the drafting; others write the letters themselves. Prudent trust creators ask their legal advisors to review letters of wishes they author to ensure that the wording can’t be construed to suggest that it contradicts the trust agreement, let alone overrides it. (For areas settlors and their advisors should consider covering, see “Letters We’ve Seen,” p. 55.) 

 

Trust Officers’ Perspective 

Many of our trust officers welcome well-crafted letters of wishes or other expressions of settlors’ intent but don’t feel these letters should be considered essential to effective trust administration. 

One trust officer said: 

 

I like it when a settlor provides a letter of wishes, because the more information a trustee has to carry out the settlor’s wishes, the better—so long as the letter doesn’t intentionally or inadvertently hem the trustee in. The worst thing grantors can do for their heirs is stand in the way of flexibility. Life and the things that happen are simply unpredictable.

 

Another said: 

 

A letter of wishes that tells the trustee—‘here’s what I was thinking,’ rather than, ‘here’s how I want you to do your job’—is much more helpful, because it’s impossible to anticipate all of the issues that might arise in the years and decades of a trust’s existence, let alone how a trustee should respond to them. 

 

Some trust officers encourage a grantor to write a letter only if she has strong feelings about a particular issue, such as supporting descendants’ abilities to engage in charitable work or helping family members see themselves as stewards of a fortune. 

 

Practitioners’ Perspective

Legal advisors differ on the utility of letters of wishes. Some suggest that guidance is better placed in the trust agreement itself; others express concerns over how the letters may be interpreted by beneficiaries or tax authorities. 

We’ve identified eight potential issues related to letters of wishes:

1. Retained control. Because a letter of wishes may be changed, some practitioners are concerned that it may appear the settlor is exercising impermissible control over the administration of trust assets. 

For example: A mother created a trust for the benefit of her son and throughout the trust agreement authorized the trustee to be extremely generous, keep the son in a very comfortable lifestyle and favor him over the remaindermen. Later, the mother and son had a falling out. She grew critical of the son’s life choices, friends and views. She then provided the trustees with a letter of wishes expressing her desire that distributions be scaled back to a minimum. 

The trustee demurred, pointing out that the level of distributions was reasonable, maintainable and within the trust’s guidelines. Had the trust officer followed the mother’s new instructions, his actions might be construed as an implied agreement between the settlor and trustee to follow the settlor’s wishes regarding trust distributions, raising concerns about inclusion of trust assets in the settlor’s gross estate under Internal Revenue Code Sections 2036 and 2038. 

Neither the Internal Revenue Service nor the U.S. courts have declared a letter of wishes, by itself, to constitute an impermissible retention of control over an irrevocable trust, but, in several cases, the IRS has argued that side arrangements between a settlor and trustee constitute evidence of a settlor’s retention of indirect control over trust assets, causing estate tax inclusion. But, these cases were decided on the transferor’s “being so able to dominate the nominal holder of the power as to make such party’s individual judgment meaningless” and a “side agreement” with the trustee.4 

The courts are, generally, reluctant to attribute the powers of a trustee to the trust’s settlor, citing the trustee’s overriding fiduciary duties to trust beneficiaries.5 However, it’s important that a settlor reiterate in any letter that the views expressed aren’t binding on the trustee, that the trustee retains all discretionary powers granted in the trust instrument and that the letter is intended merely as an expression of the settlor’s desires to assist the trustee if they prove helpful in the exercise of the trustee’s discretion.

2. Inconsistencies. Another concern is that a letter of wishes may suggest actions inconsistent with a trust’s governing provisions. For example, an issue may arise if the settlor recommends in a letter of wishes that the trustee pay for a teenage beneficiary’s tuition to attend a private high school when the trust instrument restricts distributions for a beneficiary’s education to college and post-graduate expenses. 

A settlor’s advisors can help by carefully setting expectations about what these letters can and can’t do. For example, letters can state that the settlor “suggests” the trustees should feel free to distribute all the funds in a trust if they feel that doing so would be in the long-term best interests of the beneficiaries. However, letters of wishes can’t suddenly change the trust provisions governing the ages at which distributions should begin or end.

When there’s a conflict between a trust document and its accompanying letter of wishes, the trust document should always control. Still, to avoid the potential for such conflicts, attorneys either should write the letter of wishes with the settlor or carefully review letters settlors have drafted on their own.

3. Disclosure to beneficiaries. Hurt feelings and friction may result from beneficiaries seeing letters of wishes. Consider how a beneficiary might feel discovering, through a letter of wishes, that his parents were disappointed in his lifestyle and thought him incapable of handling his finances. While such insight might be helpful to a trustee, settlors should be encouraged to consider the potential damage to the beneficiary’s well-being and family relationships.

If a beneficiary were to ask for a copy of a letter of wishes, a trustee may be hard-pressed to deny the request. Trustees are generally required to provide beneficiaries, on request, with any information relevant to the beneficiaries’ interest in the trust and to allow beneficiaries to inspect the trust’s books and records.6 It’s unclear whether a letter of wishes, which could shed light on the grantor’s intent, would be included in this list of trust documents. We’ve found no reported U.S. cases specifically addressing this question.7 Presumably, though, a letter of wishes would be discoverable in litigation if it were relevant to the subject matter of the action.

A few courts outside of the United States have addressed the discoverability of letters written to a trustee. In these jurisdictions, a beneficiary generally isn’t entitled to demand a copy of the letter of wishes, as it’s thought to be related to the reasons for a trustee’s use of discretionary powers and intended to be confidential. An exception is made in the United States, however, if a trustee’s bad faith is suspected.8

Advisors should help settlors understand that there’s a risk that beneficiaries may one day see the letter. It’s, therefore, wise for settlors to write these statements with an eye toward how their beneficiaries might perceive their words. Some of the letters we see are clearly intended to serve as messages of family values and are to be shared not only with the trustees, but also with the current beneficiaries and future generations.

4. Misuse by beneficiaries. Some practitioners are concerned that beneficiaries who’ve seen a letter of wishes may try to use it to claim broader distributions than those provided for in the trust document. For example, a letter may intend to provide insight into the settlor’s thoughts about distributions for support by providing examples, such as “going on vacation or making charitable gifts.” A beneficiary might point to these examples and request funds for luxurious vacations or extravagant charitable gifts that are far beyond the family’s accustomed standard of living. 

As the letter of wishes isn’t part of the trust, the trustee could deny the request. Still, the settlor may want to consider the practical implications that any suggestions made in a letter of wishes might have on the beneficiaries’ relationship with the trustee.

5. Trustee’s ability to carry out wishes. Letters of wishes sometimes direct trustees to determine what’s happening in beneficiaries’ lives before making distributions. For instance, a trustee may be asked to consider withholding a distribution if a beneficiary has a substance or gambling abuse problem. The difficulty is that trustees often don’t have enough daily contact with a beneficiary to reliably make such determinations.

Letters of wishes should be carefully drafted to identify “considerations” as opposed to outright requirements. Settlors also may consider the value of appointing a co-trustee or trust advisor in the trust instrument who’s familiar with the beneficiary’s life and has access to information that could help the trustee make such determinations.

6. Impact on the trustee’s duty of impartiality. Some attorneys are concerned that, with multiple beneficiaries, a letter of wishes may provide information that causes a trustee to treat beneficiaries differently. But, unless the trust itself requires uniformity in distributions, the trustee’s duty of impartiality requires that beneficiaries be treated equitably, not necessarily the same. 

While the information provided in a letter of wishes can be useful to trustees charged with exercising discretion over distributions, it shouldn’t direct the trustee to treat the beneficiaries unequally. Any differences in treatment should be stated in the trust document itself.

7. Multiple amendments. There’s debate as to whether a letter of wishes should be part of the trust document or kept separate as a side letter to the trustees. Proponents of including a letter of wishes in the trust document believe that doing so helps ensure that the intentions are articulated by an attorney at the time the trust is drafted and remain fixed. Advocates of the “side letter” option say a separate document is easier to amend; therefore, it can be adjusted as circumstances change over time. 

If settlors do choose a separate letter of wishes, we find that the simpler its language, the less likely the settlors will be to make multiple amendments. J.P. Morgan wealth advisors in Asia report that clients typically review and update their letters every two to three years. In the United States, our trust officers find clients tend to update letters of wishes more as they age and revisit their estate-planning documents. As one trust officer noted: “People consider it an active part of their plan: Do they have a health proxy? Are their letters of wishes up to date?” (For tips on drafting letters of wishes, see “Drafting Considerations,” this page.)

8. Enforceability. Practitioners have asked if a letter of wishes is enforceable or could be relied on by a trustee.  

For example, imagine that a trust states current principal distributions should be made for the grantor’s children’s “best interest,” with the remainder to the grantor’s grandchildren. Then, the accompanying letter of wishes says that the grantor intends the trustee to be generous in distributions to the current beneficiaries—even to the point of exhausting the principal. 

What would happen if after 10 years, the trust has been distributed in its entirety and the grandchildren sued the trustee? 

Could the trustee rely on the letter of wishes to establish grantor intent? A court’s inquiry into the intent of a trust will always begin with the interpretation of the trust instrument itself. In determining intent, the court must first consider the plain and ordinary meaning of the words used and then consider the words in the context of the entire document.9 If the document is unambiguous, most courts won’t allow extrinsic evidence to aid in interpretation.10  

However, if you’re in a jurisdiction that follows the Uniform Trust Code (UTC), extrinsic evidence is allowed, even if the document is unambiguous.11   

Thus, whether the letter of wishes may be considered proof of the grantor’s intent may be dependent on whether you’re located in a UTC jurisdiction.

 

Final Thoughts

Letters of wishes, common elsewhere around the world, are becoming more mainstream in the United States. To avoid future difficulties, settlors’ attorneys should consider drafting or at least reviewing these letters to keep them consistent with legal standards and existing trust provisions. Because the ultimate practical application of the letter of wishes is critical, attorneys may want to consider consulting with the designated trustee early in the drafting process.   

 

 

Endnotes

1. JPMorgan Chase & Co. and its subsidiaries don’t render accounting, legal or tax advice. Estate planning requires legal assistance. You should consult with your independent advisors concerning such matters. 

2. The number of new trusts and accompanying letters of wishes may remain elevated, as the American Taxpayer Relief Act, signed into law on Jan. 2, 2013, kept the exemption high, at $5.25 million, and made the gift tax rate relatively low, at 40 percent.

3. Interviews conducted by J.P. Morgan with the firm’s wealth advisors and trust officers.

4. Klauber v. Commissioner, 34 T.C. 968 (1960), nonacq. On other issues, 164-2 C.B. 8; TAM 9043074. See also Whitt v. Comm’r, 751 F.2d 1548 (11th Cir. 1985); Skinner v. U.S., 316 F.2d 517 (3d Cir. 1963).

5. Compare Klauber v. Comm’r and Technical Advice Memorandum 9043074 with Comm’r v. Douglass Estate, 143 F.2d 961 (3d Cir. 1944).  Estate of Goodwyn v. Comm’r, 32 T.C.M. 740 (1973); see McCabe v. U.S., 475 F.2d 1142 (Ct. Cl. 1973).

6. Restatement (Second) of Trusts Section 173 (1959). 

7. For a discussion of this point and an excellent article on letters of wishes, see Alexander Bove, Jr., “The Letter of Wishes: Can we influence discretion in discretionary trusts?,” ACTEC Journal (Summer 2009). 

8. See, e.g., England Chancery Division, Breakspear v. Ackland, EWHC 220, [2008] 3 WLR 698 (Ch) (The court ruled that the letter of wishes wasn’t discoverable without showing very special circumstances that should justify overriding confidentiality, such as evidence of bad faith on the part of the trustee.) Compare with Foreman v. Kingstone, [2004] 1 NZLR 841 (HC) (The court held that a memorandum of wishes was discoverable absent special circumstances.)

9. See, e.g., Bus. Bank v. Hanson, 769 N.W.2d 285, 288 (Minn. 2009); Carter v. Carter, 2012 Ill. App. (1st) 110855. 

10. Scott on Trusts Section 38, See also Restatement (Third) of Trusts Section 21(2); 1 Scott & Ascher Section 4.5.

11 . Uniform Trust Code Section 103 (20) “Terms of a trust” means the manifestation of the settlor’s intent regarding a trust’s provisions as expressed in the trust instrument or as may be established by other proof that would be admissible in a judicial proceeding.

 

Letters We've Seen

Five common areas of concern

 

When writing letters of wishes, settlors and their advisors often consider potential provisions that address five areas of concern: 

• Productivity and education; 

• Family unity and continuity; 

• Maintenance and support; 

• Family legacy; and

• Preservation of principal and loans. 

Here’s some sample language we’ve seen covering these five areas. 

 

Productivity and Education 

I have given my trustees broad discretion. However, I want them to keep in mind my wish that my wealth not undermine my heirs’ incentive to lead productive lives. 

I encourage my trustees to make liberal distributions so that my beneficiaries may pursue education, purchase homes for use as primary personal residences, pursue careers and/or start businesses that the trustees deem to be reasonable endeavors.

Recognizing that my several beneficiaries may choose careers generating different levels of income, I encourage the trustees to consider making different levels of distributions among the beneficiaries so as to provide each the financial wherewithal to pursue legitimate careers, even if they may be less remunerative.

 

Family Unity and Continuity

Trustees should support vacations that enable the entire family to get together so they can stay connected, especially as the family becomes extended.

 

Maintenance and Support

Appropriate distributions for housing may depend on the circumstances. This includes, for example, that a roommate can be supported and (in the absence of compelling evidence to the contrary) the trustee should defer to the judgment of the beneficiary as to the appropriateness of a particular roommate and whether rent assistance should be expected of this roommate. 

 

Family Legacy

When appropriate, I would like the trustee to fund my heirs’ efforts to build a family legacy through social networking and naming opportunities, including club memberships that enable and enhance the growth of important relationships, and donations that help build public facilities, such as schools. 

 

Preservation of Principal and Loans

In determining whether to consent to a loan to one of my children, I would like the trustee to take into account that I want to encourage my children to take calculated risks when striving for profits and gains. The trustee therefore should consider itself as having the power to approve loans for high-risk or speculative projects. That is to say, the trustee should be more flexible than a commercial bank in consenting to loans.

As far as discretionary payments of principal are concerned, my wish is that the trustee’s discretion be exercised liberally, as it’s my clear intention that my children and grandchildren use and enjoy the trust assets. I also want the trustee to give preference in these distributions to my current beneficiaries, rather than preserve as much as possible for remaindermen. I have contemplated that this language might leave nothing for the remaindermen, and I am comfortable with that.

 

—These sample provisions above are for illustrative purposes only. J.P. Morgan and its affiliates, subsidiaries and/or employees thereof (“J.P. Morgan”) do not practice law, and do not give legal, tax or estate planning advice. These provisions are not intended and should not be construed as a substitute for a drafting attorney’s informed professional judgment.

 

— J.P. Morgan

 

Drafting Considerations

Follow these best practices

 

Given the concerns and realities involved in letters of wishes, consider these best practices when drafting them:

 

1. Most important, the letter should clearly state that its guidelines are “precatory,” “nonbinding,” “intended for guidance only” or “suggestive only.” Clearly reaffirm (if accurate) that “the trustee has absolute discretion.” 

2. Keep the letter’s instructions simple and as unambiguous as possible. For example: “The trustee is free to distribute all the funds in the trust to our children without regard to the needs of their descendants.” 

3. If the terms in the document have subjective determination, consider whether they should be clearly defined. For example, terms such as “qualified university” or “reputable profession” leave considerable room for judgment. 

4. State whether the letter should be kept confidential. Some letters are clearly written to serve as family values statements to be read to children and grandchildren. 

5. Even if the letter is intended to be confidential, avoid the use of derogatory statements or comments, in case the letter is subsequently discovered by the beneficiaries. 

6. Avoid creating tax or legal issues by seeking approval from the settlor on matters such as distributions or requesting the trustee behave in such a way that may be void for public policy considerations. 

7. If considerations are listed to help a trustee judge if a distribution is warranted (such as whether a beneficiary has a substance abuse problem), evaluate whether the trustee will have access to the necessary information to determine if the considerations are fulfilled or if another person, such as a co-trustee or trust protector, is better suited for making that decision. 

8. If the attorney isn’t drafting the letter, recommend that he review it and be consulted if the settlor makes any changes. 

9. Discuss the letter of wishes with the trustee before finalizing it, if feasible. Trustees may provide a unique perspective. 

10. Keep the original letter with trust records and ensure strong recordkeeping procedures are in place when substituting a new letter.                                                                                                                                                                                                                                                                                         

 

— J.P. Morgan

 
Pamela L. Lucina is a J.P. Morgan wealth advisor based in Chicago and serving the Midwest.
 
Anne F. Cutler is the estate disposition specialist in the Advice Lab, J.P. Morgan’s wealth planning think tank, based in New York.