Communicating between the lines: Using Letters of Wishes to guide trustees
When it comes to estate planning, there’s no substitute for having the right core legal documents drafted, and ensuring they align with your clients’ wishes. But no matter how carefully estate planning documents are drafted, it’s impossible to anticipate every eventuality – and, the truth is, life often moves faster than clients do when it comes to updating their documents. One great way to bolster an estate plan against the unexpected, and to help trustees make decisions in accord with client expectations, is through Letters of Wishes.
What is a Letter of Wishes?
A letter of wishes is simply a letter written by a trust settlor to the trustees outlining the settlor’s intent and goals regarding the trust. While a lawyer can prepare a letter of wishes, it is not a legal document and is not legally binding, and so does not need to be prepared by a lawyer or in any special format – it can be as simple as a handwritten letter or a typed word document. Because it also does not need to be executed in any special way (although it should be signed and dated by the trust settlor), it can be revoked and changed as often as the settlor desires. Updating the letter periodically is part of its appeal and benefit, as it can be revised at any time to reflect changing family circumstances and desires as time passes.
How Letters of Wishes work
When assets are placed in a trust, the trust agreement will set out the terms of the trust, including how the trustee should invest and administer the assets, as well as, how and when the assets should be distributed to the trust beneficiaries. The trustees are then bound to follow the terms of the trust. If the trust is prescriptive, the trustee can simply carry out his or her duties as prescribed by the trust agreement.
Most often, however, the trust will provide that the trustee has some amount of discretion as to certain aspects of the trust administration, including distributions. While that may work well while the trust settlor is alive, providing the trustee the option to confer with the settlor regarding his or her intent, future trustees may struggle with such open– ended authority.
For example, if the trust continues for many generations, future trustees may have less intimate knowledge about the settlor, the settlor’s goals and wishes regarding the trust assets, and possibly even the family in general. In these cases, a letter of wishes – a non– binding document that guides the trustees of an irrevocable trust – can be instructive to the trustees following the settlor’s death. And these wishes – and their associated guidance – can help reduce conflict between the trustee and beneficiaries.
What should be included in a Letter of Wishes?
Given the personal nature of the information contained, all letters of wishes will differ from one another, and so there will be no “standard” version. However, a letter of wishes will typically cover:
- the settlor’s overall intent with respect to the trust funds and what is important to the settlor,
- the settlor’s wishes regarding periodic and regular distributions to the trust beneficiaries,
- guidance regarding large distributions for specific reasons (i.e., to start a business, to purchase a home, etc.),
- whether certain beneficiaries (such as a settlor’s spouse) should be considered a priority to others.
When writing, remember that the letter of wishes is meant to provide color and even examples for the trustees about what the goals are for the administration of the trust – sometimes, even excerpts from writings that have impacted the settlor’s vision are helpful to include.
Topics that are commonly included in letters of wishes are the following:
- The amount and frequency of distributions (e.g., annual distributions, distributions at certain milestones, etc.)
- Whether the settlor is charitably inclined and hopes that distributions are made to charitable organizations (and if so, which ones)
- What certain trust terms mean to the trust settlor (e.g., whether distributions for “education” should include post – graduate degrees or whether it should include only x years of education)
- The settlor’s goals concerning beneficiary education regarding trust assets and investments
It is important to keep in mind that the letter is not legally binding, so it cannot change the terms of an irrevocable trust, and its terms should not conflict with the terms of the trust to not confuse a trustee. The letter can express only the wishes of the settlor and cannot dictate or direct the actions of a trustee. If an attorney has not drafted the letter, it is generally recommended that an attorney review the final draft to ensure that its terms complement and do not contradict the trust agreement in any way.
Who needs a Letter of Wishes?
You or your client should consider drafting a letter of wishes if you have created a trust during your lifetime or expect to create a trust at your death under your will. The client should think about what values are important to them and their family and convey them to the trustee, together with how they hope that the trust will be administered when they are no longer available to guide the trustee. Your client can be as specific or as broad as they would like and as they feel would be helpful to the trustee in interpreting the terms of the trust. Feel free to include examples, quotes, or excerpts that convey your goals and might help a trustee understand what you hope to accomplish in passing wealth down to future generations. Finally, don’t forget to revisit your letter of wishes regularly (we recommend reviewing annually) to ensure that it is up-to-date and reflects any circumstances that may have changed in your family.
The information provided here does not, and is not intended to, constitute legal advice or tax advice; it is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with your financial advisor or estate attorney who can advise as to whether the information contained herein is applicable or appropriate to your particular situation.
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