In a discretionary trust, it is common for a settlor to leave a letter of wishes for the trustees to guide them as to the settlor’s wishes in the exercise of their discretion.
A letter of wishes is a non-binding document and do not create a legal obligation on the trustees to carry out the wishes of the settlor. Although, in making discretionary decisions, it is a relevant consideration that may be taken into account by the trustees.
The duty of the trustee, however, is to act independently and exercise the trust powers as a fiduciary under the terms of the trust deed. The trustee must not simply act as a nominee or agent of the settlor. The fiduciary obligation applies not only to the exercise of administrative powers (such as the selection of investments), but also in the context of dispositive powers (such as the allocation of income and capital between the beneficiaries). A trustee who acts as a mere nominee of the settlor risks being in breach of their fiduciary duties and liable to aggrieved beneficiaries for a breach of trust in the failure of its administration.
It is not a defense to an action for breach of fiduciary duty that the trustee complied with the settlor’s letter of wishes. The fiduciary must exercise their power independently. The trustee must balance the wishes of the settlor with the fiduciary obligations under the trust. The trustee should not be a mere rubber stamp for the settlor.
On the other hand, the courts will look at the trustee’s exercise of dispositive powers to ensure that the trustee exercises them in a responsible manner in the best interest of the beneficiaries and the trust as a whole according to any expressed wishes of the settlor and may set aside actions of trustee that are irrational, perverse or irrelevant to any sensible expectation of the settlor.
However, even if the trustee considers the letter of wishes of settlor, the ultimate decision to act in a particular manner is that of the trustee and can act contrary to the wishes of the settlor.
The settlor’s wishes are always a material consideration in the exercise of fiduciary discretions. But if they were to displace all independent judgment on the part of the trustees themselves (or in the case of a corporate trustee, by its responsible officers and staff) the decision-making process would be open to serious question.
It is a good practice that in order to avoid confusion, the letter of wishes should clearly state that it is not binding on the trustees and should be drafted in non-imperative terms.
Disclaimer: The information in this article (“Article”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this Article should be construed as legal advice from Cassady Law LLP or the author.
