What are the functions of (a) a letter of wishes, and (b) a protector of a trust? In what ways, if any, do these functions overlap? (a) Letter (or memorandum) of wishes is a document drafted by the settlor of a trust to the trustees of this trust and expressing the settlor’s wishes as regards the management of the trust (including distributions, etc. ). Under English law creation of a trust must mean that an actual transfer of the trust’s assets has taken place and trustees have become the legal owners of those.
Thus, the settlor’s is considered to be out of the picture. Accordingly, the settlor of a valid trust cannot give orders to trustees as to the way they manage the trust and discharge their duties. The conclusion is that any wishes of the settlor, apart from those being fixed in the terms of the trust on its creation, must not be considered binding upon the trustees, otherwise the trust may fail (as held in Chen v Ling, 2000).
In terms of the question given – it means that the function of being a legally binding and a mandatory instruction for the trustees do not apply. The real functions of letters of wishes might be divided into two groups: 1. functions for a settlor of a trust, 2. functions for trustees. 1. Settlors of trusts use letters of wishes as a way to influence the management of the assets transferred to trust even after the trust is created. Even if the wishes expressed are really considered by both parties as wishes only (i. e. ot orders of any kind) – trustees are usually ready to take them into account all the same, to avoid possible conflicts with the settlor, protector or beneficiaries, if the latter are influenced by the settlor (or else the settlor may be a beneficiary himself). Such conflicts may possibly lead to litigation or to trustees’ replacement (for instance, by a protector, who may be given such powers). In practice, letters of wishes are being occasionally updated, so that trustees are aware of the current thoughts of settlors on the due management of trusts. . As for trustees, they may use letters of wishes as a useful source of information, so they could know how to better exercise their discretion and, the same, how to avoid possible conflicts with the other parties which may arise if the will of the settlor is grossly ignored. (b) A protector is a person (or office) appointed by the settlor on formation of the trust to (depending on the terms of a certain trust): give or refuse onsent to the trustee’s exercise of his various powers and discretions and/or having power to replace/dismiss a trustee/trustees, to add/exclude beneficiaries, to apply capital, to settle capital on beneficiaries, to transfer funds, to distribute capital on the expiration of the trust period, etc. etc. As we see, a protector’s powers may be quite extensive depending on terms of a certain trust instrument. In the English law there are no provisions on protectors and protectors themselves have first appeared in the offshore world – which historical background helps to explain the functions they have.
The idea is to have a control over an appointed trustee – to appoint a person the settlor trusts a protector to control the actions of a trustee (for instance, of a trustee of an offshore trust, which trustee the settlor might know only little about). The possible alternative is to appoint a co-trustee rather than a protector. It is right to infer that letters of wishes and protectors do overlap in their functions: both are used by settlors of trusts to influence the way a certain trust is managed after its creation.
Letters of wishes suggest a direct connection between the settlor and his trustees, but the “wishes” are wishes only; on the contrary, introducing protectors suggests indirect (via third parties) influence on trustees by the settlor, but the actions of protectors are really influential if duly supported by the trust instrument. And in both of these cases proved fact that a settlor is still interested in the assets of the created trust or has direct control upon its management may lead to a failure of the trust. This taints the abovementioned “influence” function of both of these legal tools and makes its exercise more precarious.