Elements of Letters of Wishes
A letter of wishes would typically guide a trustee in the day-to-day administration of property held in trust by setting forth your goals, attitudes, and expectations with respect to the investment, expenditure, and disbursement of wealth. By providing them with careful descriptions of your wishes, the trustees will be better equipped to reinforce and develop the values that are important to you, such as productive lifestyles and philanthropic endeavors.
We have outlined below three categories of goals and objectives that are typically described in letters of wishes: Beneficiaries, Distributions, Investments, and Administration. Within each category, we have provided examples of the specific concerns that are most often addressed in letters of wishes, as well as some sample language for your consideration. While this is by no means an exhaustive discussion of the topic, we hope that it will be a helpful guide to you as you formulate your goals and objectives for the stewardship of your wealth across generations.
Although the trust agreement specifies the beneficiaries of a trust, the trustee is given the discretion whether or not to make a distribution to a beneficiary at any time. It may be desirable in certain circumstances to provide guidance to the trustees with respect to which beneficiaries should receive distributions, any special needs of a beneficiary and the changing circumstances of a beneficiary.
Trusts typically have more than one eligible beneficiary (often including both current and future beneficiaries), and the trustee is often given broad discretion as to whether and how much to distribute among beneficiaries. Such a trustee is faced with the decision of whether to make distributions to only one beneficiary or to multiple beneficiaries, and whether or not to distribute the same amount to each beneficiary. It may be helpful to provide guidance to the trustee as to the preference, if any, of one beneficiary over the others or to communicate to the trustee that some or all of the trust beneficiaries should be treated equally. Even if all current beneficiaries are treated equally, distributions to them may be seen as disadvantaging future beneficiaries, so guidance in this regard is also helpful.
For example, where a trust is for the benefit of a child and the child’s descendants, the letter of wishes may express that the child is the primary beneficiary by providing that, “it is my hope and intent that the trustees would consider my child to be the primary beneficiary of the trust and that my child’s needs are paramount to the needs of his or her descendants.” Similar language could be incorporated to reflect a desire to prioritize a surviving spouse’s interest over those of children and further descendants. Where a trust is intended to benefit all beneficiaries equally, the letter of wishes may express this by providing that “there should be a strong presumption of equal treatment of all beneficiaries.”
As mentioned above, the trust agreement typically will provide the trustee with broad discretion as to whether or not to distribute trust property to beneficiaries. In some cases, you may wish that beneficiaries achieve certain goals or meet certain standards before receiving distributions from a trust. If that is the case, it would be helpful to describe in a letter of wishes the characteristics or achievements of a beneficiary that a trustee should consider before making a distribution.
For example, the letter of wishes could provide that the beneficiary achieve a certain level of education, financial sophistication, maturity, meaningful employment or career development before distributions should be made. In addition, the letter of wishes could specify that distributions should not be made outright to a married beneficiary who has not entered into a premarital agreement or that “the trustees should consider the existence or non-existence of a premarital agreement before making a distribution to a beneficiary.”
Families are often concerned with the dissipation of wealth in light of a beneficiary’s changing personal circumstances. Although it is difficult to foresee how a beneficiary’s circumstances may develop over time, it is possible to include in a letter of wishes some guidance to the trustee to allow for the reduction, cessation or increased caution with respect to distributions when it would be in the best interest of the beneficiary. We generally would refer to a beneficiary whose circumstances have changed significantly as a “compromised beneficiary.”
A letter of wishes could provide, for example, that:
If the trustees believe that there exists a valid, sufficient and demonstrable reason that a beneficiary is a compromised beneficiary, and that a trust distribution would be clearly contrary to the best interests of the compromised beneficiary, the trustees are hereby advised to exercise very careful consideration in deciding what part of such property should be distributed to or for the benefit of the compromised beneficiary and what part (including the whole thereof) should not be distributed and to hold such undistributed part in trust for the benefit of such beneficiary. This is a concern because it is impossible now to foresee what unusual circumstances might exist in a beneficiary’s life in the future.
Accordingly, the trustees’ discretion should be exercised solely in light of a beneficiary’s best interests as determined at the time when a distribution decision is being made.
Some examples of circumstances that may cause a beneficiary to be a “compromised beneficiary” include:
- being a defendant in serious litigation;
- being a party in a bankruptcy proceeding or in similar severe financially difficulty;
- having serious matrimonial problems or contemplating or entering into divorce proceedings;
- suffering a physical, mental or emotional condition that impairs the beneficiary from properly administering any distribution from the trust;
- being subject to undue influence by a close personal friend, family member or other person to utilize trust distributions for purposes other than those described herein (including the beneficiary’s transfer of assets to such a person or use of assets for the benefit of such a person); or
- belonging to, associating with or being under the influence of a religious sect, political organization, or other group that requires its adherents to abide by extreme doctrines or tenets, as a result of which the beneficiary is no longer able to exercise independent judgment with respect to his or her personal or financial affairs.
Where a trust permits distributions to charitable beneficiaries as determined by the trustee, you may wish to express your wishes with respect to charitable intent in a letter of wishes. The letter of wishes may specify a desired level of charitable distributions and may request that distributions be made to specific charitable organizations or for particular charitable purposes that are of importance to you.
Beneficiaries with Special Needs
You may wish to make provision for a beneficiary with special needs, such as a mental or physical disability, or who has established or foreseeable medical costs, such as your grandmother.
For a beneficiary such as your grandmother, the letter of wishes may provide that “generous distributions be made for the health-care costs of the beneficiary, including the costs of inpatient and outpatient care, medications, dedicated medical staff and any other similar expenses to ensure that the beneficiary receives the highest quality of care possible with the maximum level of comfort.” In addition, with respect to the possibility that a beneficiary in the future could become subject to a mental impairment, the letter of wishes could provide that the trustee “weigh all attending circumstances and be cautious and judicious when evaluating requests for distributions from the beneficiary.”
You may prefer that the trustee consult with someone before making a distribution to a trust beneficiary. Generally, the individuals who are consulted are trusted to have knowledge of the beneficiary’s personal circumstances and your goals so as to provide valuable advice to the trustee. The letter of wishes could request that the trustee consult with an individual, most often the beneficiary himself or herself, a parent or guardian of the beneficiary, the protector of the trust or a trusted family advisor or committee, and could set forth guidelines with respect to how much weight a trustee should place on advice from a particular individual.
For example, a letter of wishes could request that the trustee generally defer to the judgment of an advisor by providing that “the trustee consult with [individual] and honor all reasonable requests for distributions made by him or her unless you believe such distributions would be seriously detrimental to the beneficiary.” Alternatively, a letter of wishes could simply provide that the trustee take into account the additional information and guidance provided in a consultation and ultimately make a decision regarding distributions based on all of the relevant facts and circumstances known to the trustee.
The letter of wishes could also provide guidance to the trustee with respect to the relative weight a trustee should place after consultation with a particular individual. For example, the family could provide that the “trustee consider the wishes of a beneficiary, particularly after the beneficiary attains age X or has achieved a level of financial sophistication and career development appropriate to his or her age and education.”
Amount and Timing of Specific Distributions
Generally, trust agreements will provide for distributions to trust beneficiaries at any time and for any reason in the discretion of the trustee. You may wish to provide some additional guidance to the trustee with respect to trust distributions, particularly if the family is concerned that a beneficiary may not have sufficient access to trust property. It may be helpful to the trustee for you to describe your wishes with respect to how much of the trust property should be distributed at what times. A letter of wishes could also provide for more flexible distribution standards (discussed in paragraph c. below), instead of distributions of particular amounts at specific times.
With respect to the timing of distributions, it is most common to provide that distributions be made when a beneficiary attains a certain age. With respect to beneficiaries who may require regular distributions for regular support, such as parents or the elderly, it may be preferable to specify monthly, semi-annual or annual payments in order to anticipate the beneficiary’s needs.
With respect to the amount of distributions, a letter of wishes may provide that either a specified dollar amount (adjusted for inflation) or a percentage of the trust principal be distributed to beneficiaries at the specified times. However, for larger trusts, it is more common for the letter of wishes to provide a cap on the maximum dollar amount or percentage of trust property that should be distributed to beneficiaries. For example, annual distributions might be limited to 4% of the trust’s value as a means to help ensure that the trust’s purchasing power keeps pace with inflation.
Flexible Distribution Standards
Another method of providing guidance to the trustees regarding distributions is to set forth in a letter of wishes more flexible distribution standards. In contrast with the wishes described above requesting specific timing and amount of distributions, flexible distribution standards described in this section may take into account the different lifestyles of beneficiaries or a preference for distributions that achieve family goals and objectives. By describing your attitudes and objectives with respect to the use of trust property, it may be possible to encourage beneficiaries to engage in behavior that is consistent with your values.
Values Regarding Lifestyle
Many letters of wishes describe a general attitude towards the use of trust property for the day-to-day needs and lifestyle of the trust beneficiaries. A description of this type could be invaluable to a trustee in determining whether or not to make distributions to a beneficiary that fall within the spirit of your values.
For example, a letter of wishes could describe a very flexible distribution standard for purposes of maintaining the beneficiary’s lifestyle by providing that “the trustees make frequent periodic distributions to the beneficiaries as the trustees determine reasonable and appropriate for health, support, comfort and maintenance in the lifestyle to which they shall have become accustomed, including for educational expenses and living expenses, such as housing, transportation and vacations.”
Alternatively, if you wish to suggest a more modest lifestyle, it may be preferable to include language in a letter of wishes providing, for example, that, “although distributions to beneficiaries should allow them to live comfortably, the assets should not be used to support a lavish or extravagant lifestyle or to support a life clearly characterized by idleness, dissipation or excess.”
Distributions for Specific Purposes or Endeavors
In addition to a general statement regarding the use of trust property for the day-to-day needs of trust beneficiaries, you may wish to more specifically describe certain purposes for which trust distributions would be preferred. Such preferred purposes or endeavors are most often in the area of education, career and professional development, and other endeavors such as the purchase of a family residence or support of philanthropic causes. Below are some examples of broad language that could be used to describe distributions for these preferred purposes.
- It is my wish that the trust assets should be used to support the true needs of my children, grandchildren and future generations, to help each of them to live up to their full potential, to pursue their personal and professional goals, and to develop their best qualities.
- It is my wish that the beneficiaries be provided with the finest educational opportunities available, consistent with each beneficiary’s needs and talents. In this regard, “education” includes, without limitation, private primary and secondary schooling, college and professional education, summer camp, tutoring, lessons in music, art, dance, sport and other cultural and physical activities, purchase of appropriate equipment, such as musical instruments, computers, athletic and other supplies, etc., supervised educational travel and all other activities that the trustee deems to have a basic educational function. The costs of these educational activities shall include, but not be limited to, tuition, fees, room and board, travel expenses as needed, equipment costs, and all other necessary or appropriate expenses, as well as reasonable allowance to the beneficiary for incidental expenses while he or she is away from home.
- It is my wish that the trust property be used to foster or promote the beneficiary’s career, professional advancement and business interests (including the funding of a start-up business) so that the beneficiary may be true to themselves, primarily by pursuing worthwhile careers for which he or she is best suited and in which he or she can excel without the need to be overly concerned about his or her standard of living, which might ordinarily be the case if the beneficiary wishes to pursue a career in public service, teaching, the arts, or the like.
- It is my wish that trust property be used to help the beneficiary acquire a primary residence.
- It is my wish that you will make distributions of income and principal from the trust in support of the beneficiary’s philanthropic goals, including the support of the arts, including, but not limited to, theater, film, literature, painting, drawing or sculpture, after taking into consideration the participation of the beneficiary in such endeavor.
- It is my wish that distributions be made for the benefit of, or on behalf of, any such beneficiary thereof to support ventures which may be neither exclusively financially driven nor wholly charitable, such as the influence of public policy through lobbying or organizing political campaigns or contributing to organized political campaigns of a firmly established mainstream political party.
In addition to describing certain preferred purposes or endeavors that would be supported by trust distributions, the letter of wishes could also provide that distributions should not be made for certain purposes. For example, in guiding the trustee to provide trust property for the purchase of a family residence, the letter of wishes could also provide that the use of trust property for the purchase of a second home or vacation property is not intended.
As you can see, the possibilities with respect to distribution standards are limitless, and would be shaped primarily by your goals, values and expectations with respect to the use of your wealth.
Families that have particular investment goals or objectives typically provide a description of these goals and objectives in the letter of wishes. Often the guidance provided with respect to investments would relate to the retention of a particular investment, such as a closely-held family company, the suggested adherence to a particular investment strategy or the maintenance of a particular asset allocation for trust investments. The guidelines given to a trustee in the letter of wishes will vary greatly depending on the types of assets that will be held, or are anticipated to be held, in the trust.
Examples of some language that could be used to describe the family’s investment objectives include:
- It is the family’s hope that the assets of the trust, to the extent possible, will continue to be held in the trust for the benefit of the beneficiaries rather than be distributed such that principal of the trust will be depleted. Accordingly, the investment goals of the trust should be to preserve the principal assets of the trust for the purpose of maintaining the trustee’s purchasing power, taking into account inflation, with a hope for the maintenance and growth of the trust principal for future generations.
- It is the family’s hope that the trust property remain invested in the Family Company or any associated successor company or venture. While input from the family’s advisors should be considered and noted, it is my intention that, as long as practicable, the trust fund remain invested in the Family Company or any associated successor company or venture.
- It is the family’s belief that there are many reasonable classes of investment that could be held in the trust, including residential real estate, public equities, private equity, hedge funds and fixed income. Investment in these asset classes would be consistent with maintaining the long-term growth of trust property. In terms of asset allocation, it would be reasonable to hold approximately V% of the trust property in personal real estate investments, W% of the trust property in public equities, X% of the trust property in private equity and hedge funds, Y% of the trust property in fixed income and Z% of the trust property in other investments that you deem prudent.
In addition to describing certain investment objectives or preferred asset classes, the letter of wishes could also set forth certain investment objectives, types of investments that would be discouraged or choice of investment advisor.
- Over the years, our family has often consulted with or used [Investment Manager] to assist with administering and/or managing family and Trust assets. So long as you believe that [Investment Manager] is professionally and competently managed, it is my desire that you continue to consult with [Investment Manager] regarding the Trust’s investments or the appropriate investment management structure for the Trust’s assets.
The administration of a trust covers a broad range of topics. For purposes of this memorandum, matters of administration include your goals with respect to the trust that do not directly involve distributions to beneficiaries or trust investments. These goals most frequently include creditor protection, tax efficiency, fiduciary succession and confidentiality, each of which is discussed in turn below.
One of the most attractive features of trusts is that they may be structured so as to protect the trust property from a beneficiary’s creditors, including judgment creditors and divorcing spouses.
In some cases, it may be sufficient to describe in a letter of wishes the general goal of protecting the beneficiaries from creditors’ claims without otherwise limiting their enjoyment of the trust property. For example, the letter of wishes could provide that the trustees be “mindful of asset preservation implications of making funds available to the beneficiary outright and to consider the possible implications of holding assets in the beneficiary’s personal name rather than the assets being held in trust before making any substantial distribution of trust principal.”
However, if creditor protection is of paramount importance, more specific instructions may be provided in the letter of wishes to maximize the creditor protection features of a trust, for example:
- It is my wish that the trust property receives the maximum protection from the claims of creditors or divorcing spouses of trust beneficiaries. Accordingly trust funds should be applied to the purchase of assets (such as artwork or a home) for the benefit or use a beneficiary, for the direct payment of the beneficiary’s expenses or to be invested in a business created or expanded by a beneficiary, rather than distributed to the beneficiary outright.
- If a beneficiary becomes engaged to be married during the trust term, it is my wish that the trustee encourage him or her to enter into premarital agreement prior to such marriage in order to protect the property he or she has received or may receive by gift, devise, inheritance or distribution from any trust of which he or she is a beneficiary, and the investments and reinvestments therefrom, from claims of his or her future spouse.
Where a family has special tax considerations or particular goals with respect to maximizing the tax efficiency of family wealth, it is often helpful to describe them in a letter of wishes to the trustees.
Trustees are given significant powers and discretions over the trust assets. Accordingly, it is appropriate to focus on the issue of the selection of trustees, including successor trustees. While the selection of current trustees may be made with confidence by you, it may be advisable to provide guidance regarding the selection of future trustees. As an initial matter, the individual or individuals who may appoint successor trustees are typically set forth in the trust agreement. The letter of wishes would supplement this authority by requesting, for example, that the individual with appointment authority consult with or defer to the decision of family members or advisors with respect to the appointment of successor trustees. In addition, the letter of wishes could describe preferred qualities or attributes of a person or institution that would be named as successor trustee.
For example, a letter of wishes could provide that “qualities that are important in the selection of an individual trustee include a high degree of success in business and investment matters, a broad range of cultural and intellectual interest and a deep concern for the education and upbringing of the family members” or that “in selecting a corporate trustee, it is important that the institution have a national well-regarded fiduciary practice with over $X under management.”
In many cases, it may be desirable to appoint a trust beneficiary as a successor or additional trustee. With respect to older beneficiaries, it may be possible to evaluate their personal desire, maturity level and acumen to act as a trustee now, the family may wish to name those beneficiaries in a letter of wishes as potential candidates. With respect to younger beneficiaries whose personal interest or level of sophistication is not yet developed, the letter of wishes could provide that the beneficiary could be named as trustees, for example, “after the beneficiary attains age X or has achieved a level of financial sophistication and career development appropriate to his or her age and education.”
A final matter that may be addressed in a letter of wishes is confidentiality. As you can see, an effective letter of wishes may contain sensitive personal and financial information that you would like to be kept confidential. You may specify that the contents of the letter of wishes be kept confidential unless required to be disclosed by law. In addition, the letter may provide that provisions relating to a particular beneficiary may be discussed with that beneficiary, or that particular individuals be granted unrestricted access to information regarding the trust, including the letter of wishes. An example of such a provision is as follows:
- This letter is to be considered private and confidential during and for the trustee’s information and use only. However, the trustee should feel at liberty to discuss with each beneficiary the portion(s) of this memorandum specifically relevant to such beneficiary. It is the family’s request that this letter not be disclosed to any other party in any other situation unless the trustee is compelled to do so by order of a court of competent jurisdiction or unless the trustee feels it is in the best interest of the beneficiaries or the trust generally. Any such disclosure shall not create access by other parties. Notwithstanding the foregoing, it is the grantor’s wish that [certain beneficiaries] shall have unrestricted access to information regarding the trust during their lifetimes.