What is a letter of wishes (LOW)?
A letter (sometimes called a memorandum) of wishes (the “LOW”) is a document written by the Settlor of a Trust and can be a very useful tool in helping the Trustees to manage and administer the trust - in particular it is a very common device when a discretionary trust is created.
A LOW provides guidance to the Trustees as to the manner in which the Settlor would like the trust fund to be administered for the benefit of their intended beneficiaries and it allows the Settlor to guide the Trustees on specific, sometimes difficult, issues when they are not in a position to assess for themselves all the circumstances relevant to the exercise of their powers and discretions.
What a LOW should include?
Given that the purpose of a LOW is to support the trust instrument and aid the Trustees dealing with the trust fund, it should not include anything that may conflict with it.
By way of example but not limited to, the LOW may provide guidance on the following points:
- How the Settlor intends to provide for the beneficiaries out of the trust fund (e.g. whether they should receive income and/or capital at certain ages or upon the occurrence of particular events).
- The elements that the Settlor wants the Trustees to consider in deciding when and/or how to make distributions to a beneficiary. For example, it may request the Trustees not to make distributions if the beneficiary is unable to manage its finances properly or is going through a divorce.
- The Settlor's wishes as to the investment approach to be adopted for the trust fund.
- The identification of a 'default beneficiary(ies)' - the person(s) or charitable institution(s) that the Settlor wishes to receive the trust fund in the event that none of the specified beneficiaries are alive when the trust comes to an end.
- Guidance on the approach to be taken to resolve any disputes that may arise in relation to the trust (e.g. encouraging the parties to use out-of-court mediation).
Can the LOW bind the Trustee?
It should be emphasised that the LOW is not legally binding on the Trustees but may be taken into account by them as an ‘element of appreciation’ in the exercise of their powers. However, the Trustees remain free to exercise their discretion in this regard.
Can a LOW be changed?
Yes – the letter should be reviewed regularly, especially when important changes occur of which the Trustee should be aware.
What the formalities for a LOW?
In terms of formalities, there are no particular legal requirements for a LOW. It can be drafted in writing (either by hand or typed on a plain paper) or the wishes can be communicated orally to the Trustee, however, it is very important that such wishes do not conflict with the trust instrument.
A Settlor can draft a LOW at any time, but ideally it should be done at the same time as the trust instrument is drafted (save later amendments to reflect changes in personal/family circumstances) as all matters are still clear in the Settlor's mind.
If drafted in writing, the LOW must be signed (ink pen signature) and dated but need not be witnessed.
Once drafted, the LOW must be delivered to the Trustee. Delivery does not involve any specific formalities: it can be done by hand, or via certified e-mail (e.g. Certified e-mail in Italy) or via ordinary mail.
If a protector is appointed - the person to whom the Settlor has entrusted the task of supervising the Trustee's proper execution of their wishes - the LOW, although not directly addressed to him/her (as he/she is not the person with the power to administer and manage the trust fund), should be brought to his/her attention.
The advantages of LOWs
One of the greatest advantages of the LOW is that it is confidential, also in respect of the trust beneficiaries. Only in very limited circumstances the Courts may order the disclosure of a LOW.
The LOW is remarkably flexible, it can be changed and updated whenever the Settlor so desires, thus without the need to change the trust deed to which it refers. However, as already mentioned above, the LOW is relevant only if it is in line with the overarching purpose of the trust gathered from the trust instrument and it cannot override the terms of the trust.
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