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Memoranda of Wishes

Subordinate or insubordinate?

Trust settlors commonly provide a memorandum of wishes to the trustees. However, the extent to which the trustees are bound to follow these wishes is unclear.

The traditional role of the settlor in the family trust has been simply the making of an initial settlement onto the trust, to be held by the trustee or trustees for the beneficiaries alone.  After this initial settlement, the settlor has a very limited role in the management of the trust.   The settlor has no rights either to direct the trustee’s actions, or to take back the property the settlor has given away. This reflects the fundamental premise of a trust, whereby the settlor has given away control of the settlor’s assets.

The memorandum of wishes is therefore a mechanism by which the settlor can attempt to exert residual influence over the management of the assets the settlor has sacrificed control of.   As noted in Breakspear v Ackland  [2009] Ch 32:

“The defining characteristic of a wish letter was that it contained material which the settlor desired that the trustees should take into account when exercising their (usually dispositive) discretionary powers.”

A memorandum of wishes is rarely binding on trustees.   However, a memorandum will generally be “legally significant,” in that it will provide guidance for a trustee. The general understanding is that so long as the trustee considers the guidance provided, the trustee will not be held accountable for exercising the trustee’s powers and discretion in any particular manner.   

The current place of the memorandum of wishes in New Zealand  is summarised in Harrison v Harrison  [2015] NZHC 2935 at [53] where the High Court adopts the following summary from Lewin on Trusts (19th ed, Sweet & Maxwell, United Kingdom, 2014) at [29–162] – [29–163] (our emphasis and added citation):

“Settlor’s wishes

Trustees therefore rightly give great weight to the settlor’s wishes, either expressed from time to time during his lifetime or recorded, usually in documentary form, before his death. Letters or memoranda of wishes from the settlor are now commonplace; on occasion a precatory clause is inserted in the trust instrument, for example asking the trustees to consider someone as the primary beneficiary. The significance of the settlor’s wishes has grown with the growth of wide discretionary trusts and powers in preference to trusts comprising wholly or mainly fixed interests. Without some guidance from the settlor, trustees would often have difficulty in identifying who ought to benefit. “The settlor’s wishes”, the Supreme Court [in Pitt v Holt [2013] 2 WLR 1200] has held, are always a material consideration in the exercise of fiduciary discretions”. It was previously well established that the trustees are entitled to take serious account of the settlor’s wishes and it is the better view that they are bound to do so; the notion that the trustees may be entitled to take it into account but not bound to do so is in our view wrong, for it is either a relevant consideration which in view of its importance ought to be taken into account or an irrelevant one which should not. The trustees may properly be led by the settlor’s wishes to take a decision which they would not otherwise have taken. The propriety of deference to the settlor’s wishes is also reflected in the decisions on applications by beneficiaries for disclosure of letters or memoranda of wishes. Although such applications have met with varying degrees of success, no criticism is made in them of trustees who pay close attention to the settlor’s wishes. In a different context, the court has treated it as a sufficient reason for overturning an appointment made by trustees that they believed that they were thereby giving effect to the settlor’s wishes when in fact through a misunderstanding, they were not.”

For the alternative view, David Russell and Toby Graham statee in Trusts & Trustees that “… letters of wishes are only relevant to the extent that they are compatible with the trust’s purposes and are, therefore, subordinate to those purposes.”

Compare this with the following passage from the Court of Appeal decision in Chambers v SR Hamilton Corporate Trustee Limited:

“Settlors are entitled to express their wishes for the benefit of trustees, and trustees are entitled to take them into account. They can be important guidance to them in the exercise of discretionary powers. However trustees, whatever a settlor’s wishes, must conscientiously apply their independent discretion in exercising their powers. Wishes can only be taken into account if they are not inconsistent with the purposes of the trust as appear from its written terms. Trustees should not blindly obey all settlor instructions. It is necessary for trustees to read and understand a memorandum of guidance to discern the settlor’s wishes, and then with those wishes in mind make an independent assessment of the appropriate course of action, taking into account not just the memoranda, but all relevant factors.”

Want to hear more on Memoranda of Wishes? Join Vicki Ammundsen to hear her views on memoranda of wishes:

CPD: trusts–memoranda of wishes–webinar 1pm Friday 27 November 2020

https://remotelegalnz.com/product/cpd-trusts-memoranda-of-wishes-webinar-1pm-friday-30-november-2020/embed/#?secret=DL0GIPJWmB

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