• February 21, 2024
 The importance of carefully drafted letters of wishes

The importance of carefully drafted letters of wishes

Introduction

The starting point is that while wills are public documents, any accompanying letters of wishes are confidential between the testator and their trustees. There is, of course, a good reason for this position. Letters of wishes generally seek to inform trustees’ deliberations regarding discretionary dispositions, and these deliberations are inherently confidential (Brakespear v Ackland).

However, in practice, letters of wishes are increasingly prepared in such a way that they can be disclosed and even referred to in court if necessary. Recent case law provides an example of a letter of wishes being used as evidence and, therefore, underlines the importance of drafting such documents with this in mind. While the case law relates to a complex trust structure, it has wider applicability.

This article examines the case and then some of its implications for will and probate practitioners.

Grand View Private Trust Company v Wong & Others [2022] UKPC 17 (“the Wong case”)

The Background

The Wong case concerned two brothers, YC Wang and YT Wang (“the brothers”), who founded Formosa Plastic Group (the Company), a large conglomerate business in Taiwan, in the 1950’s. YC Wang died in 2008, and YT Wang died in 2014, leaving 17 children, many grandchildren and two offshore trusts ultimately holding shares in the Company.

The first was the Global Resources Trust (“the Family Trust”), a dynastic trust for the children and remoter issue of the brothers, which held shares in the Company worth c.$560 million. The second was the Wang Family Trust (“the Purpose Trust”), which benefited a number of charitable and non-charitable purposes (including holding FPG shares) and was worth c.$3.5 billion.

The rationale behind this structure was to use the wealth created by the Company to benefit society (via the Purpose Trust) and incentivise the family to contribute to the business (via the Family Trust).

Later, the brothers decided to retain some shares which their descendants would inherit directly. As the family would be receiving wealth this way, the brothers asked the trustee to decant the Family Trust into the Purpose Trust. This was done by adding the Purpose Trust as a beneficiary, excluding the family beneficiaries and then appointing the assets of the Family Trust to the Purpose Trust.

After the death of the brothers, some of the family members challenged this restructuring on the basis that the trustee had fundamentally changed the “substratum” of the Family Trust (which was, in effect, a dynastic family trust) and entirely undermined its purpose by transferring the assets to the Purpose Trust. The claim was heard at first instance and appealed in Bermuda and then the Privy Council.

The dispute

As readers will be aware (and as the Privy Council confirmed in its judgment), when exercising discretion, trustees must (a) operate within the express or implied terms of their power, (b) give adequate deliberation as to how the power should be exercised, and (c) use the power for a proper purpose.

The trustee’s actions in adding WFT as beneficiary, excluding the family members and appointing the assets to WFT were within its powers – the trustee had wide discretions – and the trustee’s evidence was that this was intended as a flexible and dynamic structure as a whole. The question, however, was whether these actions were a proper purpose or whether they constituted a fraud on the powers.

Relevance of letters of wishes

Pausing briefly here and looking back slightly further in time, there has been a line of authority considering the disclosure and admissibility of letters of wishes. In Re Rabaiotti and Re Avalon, it was held that letters of wishes were confidential, but the court could order disclosure if good reasons existed (e.g. to establish the purpose of the trust).

In the leading case of Brakespear v Ackland, Briggs J placed emphasis on the proper administration of the trust. He found that disclosure may be necessary to hold a trustee to account. However, this will not always compel a trustee to disclose a letter of wishes as trustees are not accountable to their beneficiaries for the reasons behind the discretionary exercise of powers. This leads, then, to the Wong case.

The memorandum of wishes in the Wong case

In the Wong case, Lord Richards confirmed (in paragraphs 57 – 68) that the court’s approach to the construction of a trust deed and fiduciary powers is similar to the construction of contracts “with the necessary modification that is the intention of the settlor […]is to be objectively determined by the terms of the instrument construed in light of the circumstances in which it was made” (emphasis added)

The brothers had signed a memorandum of wishes shortly before forming the two trusts, which set out their intention that the Family Trust was formed to benefit their children. This letter of wishes (and other factors, such as the description of the GRT in the recitals) was admissible evidence which persuaded the court that the purpose of the Family Trust was to benefit the family beneficiaries.

The Privy Council concluded that the exclusion of the existing beneficiaries and the addition of a purpose trust in place of the previous beneficiaries was an invalid exercise of the trustee’s powers. If, as the letter of wishes said, the intention of the Family Trust was to benefit the family, then how could excluding them in order to benefit another trust be in line with the proper purpose?

Finally, it should be noted that in the Wong case, the settlers had, while still alive, specifically asked for the Family Trust assets to be transferred to the Purpose Trust. The Privy Council concluded that while trustees can have regard to later wishes, they are not relevant in establishing the proper purpose of the relevant powers. The fact that the settlers wanted the trustees to do this did not enable them to do so.

Implications of the Wong case

While the Wong case relates to large Bermudan trusts, and the Privy Council judgment is not technically binding in England and Wales, the principles are likely to be applicable to wills in England and Wales where, for example, will trustees have been given discretionary dispositive powers or there are ongoing trusts. The implications of the case include the following:

  1. Testators and settlers will wish to give careful thought to letters of wishes (and other factors such as recitals to trust deeds) and remember that they could be vital documents in construing the proper purpose of any discretionary powers.
  2. In practical terms, while letters of wishes may have been drafted in relatively informal ways in the past (and might have included, for example, reference to more emotional material), it is often preferable to draft them in more neutral and deliberate language.

And, slightly more widely:

  1. The case is a reminder that any trustee making a momentous decision can face subsequent challenges, and for this reason, such decisions must be carefully considered, properly documented, and, where appropriate, thought given to obtain judicial approval.
  2. Where a settlor is still alive and presses a trustee to exercise their powers in a particular way, the trustee will wish to bear in mind that this may not be a valid exercise if it is not in accordance with the proper purpose of the trust as set out in the trust documents.

Written by Adam Carvalho, legal director, and Jade Smith, trainee solicitor, at Myerson LLP

Myerson LLP