Letters of Wishes- Do They Work?

With trusts now becoming much longer in duration with the elimination, or curbing, of the rule against perpetuities in many state statute, i.e., a dynasty trust for multiple generations, and the greater use of discretionary trusts where the trustee decides whether, and when, to distribute income or principal among several trust beneficiaries, it is natural for the trustee to want as much information as possible in order to administer the trust. This is why the trust creator is often encouraged to leave a companion letter of wishes to provide a guide to the trustee as to the creator’s wishes when discretionary decisions are made about the trust and its administration decades into the future.

Yet sometimes the use of a letter of wishes can pose a problem, since the letter might be inconsistent with the actual trust terms, which creates an ambiguity. The trust instrument’s distribution terms might be inherently subjective, like may distribute for the beneficiary’s health, education, support and maintenance; if so, that is why a trustee often appreciates a companion letter of wishes to provide it with more guidance and background information to carry out the trust creator’s intent. However, such a letter may also be much more restrictive than the trust’s use of the term’s sole discretion.

Courts have taken varying positions when it comes to letters of wishes, but they often decline to consider a letter of wishes when the trust’s terms are clear and not ambiguous. As a rule, the trust creator’s intent is determined contemporaneously with the execution of the trust, not when a letter is written long after the trust is established. The trust creator’s intent is usually determined at the time of the creation of the trust, not when a letter of wishes is written.

A letter of wishes can create practical challenges as well for the trustee, since the letter can create unrealistic expectations of the trust beneficiary, even if the letter is non-binding. Or the letter can have language or explanations of ‘why’ some trust provisions were included which might cause the trust beneficiary emotional distress or resentment. There are also occasions when a letter of wishes will direct the trustee on how investments are to be made with trust assets, which directions are inconsistent with the trustee’s fiduciary duty to abide by the prudent investor rule when it invests trust assets. While a letter of wishes can provide insight into the trust creator’s intent for the trust and how its assets are intended to benefit trust beneficiaries, that intent cannot override the objective standards of the prudent investor rule, absent some statutory provisions that authorize additional flexibility afforded the trustee in making trust investments.

Unfortunately, Michigan’s common law and its Trust Code do not expressly authorize the use of a letter of wishes or how they are to be used by the trustee, or whether the trustee must provide copies of the letter of wishes to the trust beneficiaries. In fact, many courts will decline to consider the trust creator’s later-written letter when the terms of the trust are unambiguous. Courts are normally reluctant to consider ‘extraneous’ documents or writings when called upon to interpret or construe the terms of the trust. In contrast, though, a trustee is expected to consider all relevant evidence, not just the trust’s terms, when it administers the trust for the sole benefit of the trust beneficiaries.

With this background on letters of wishes, it is interesting to note that in 2019, Delaware amended its trust statute to codify the use of letters of wishes when a trustee administers a trust. That statute defines a letter of wishes as a non-binding record from the creator of the trust, called the trustor, which has precatory language that expresses the trustor’s wishes about the trustee’s discretionary powers. This Delaware statute stipulates that the trustee “may consider precatory language” but the trustee is not bound to do so, and the trustee’s failure to follow such language in the letter of wishes does not imply any improper conduct by the trustee. Under this Delaware statute a court is also authorized to consider the letter’s precatory language, regardless of the trust instrument’s ambiguity or clarity. In addition, a Delaware trustee is exempt from any duty to show the letter of wishes to trust beneficiaries, absent a court order. In short, contrary to the common law regarding letters of wishes, Delaware’s statute expressly provides a framework that emphasizes the non-binding nature of a trust creator’s letter of wishes while providing some degree of judicial recognition of that letter.

While this Delaware legislation is a good start to ensure the legitimate use of letters of wishes, there are still some unanswered questions. One is what is the weight to be given to the letter of wishes by a judge in a dispute between the trust beneficiaries and the trustee? Another is the lack of direction given to the trustee when it tries to balance the trustor’s wishes with the trustee’s fiduciary duty to act in the best interest of all trust beneficiaries when faced with conflicting or ambiguous guidance in the letter.

The use of letters of wishes will continue to aid trustees so long as long-term trusts are used to avoid federal transfer taxes over several generations, and discretionary trusts continue to be effective to protect trust assets from the trust beneficiary’s creditors or in a divorce. Whether a Michigan court will consider or rely on letters of wishes remains unanswered, but these letters will continue to aid a trustee to better understand the trust creator’s purpose and intent with the trust where the trustee must implement subjective trust distribution provisions.