Trusts: Letters of Wishes
Statutory regime
The nature and status of letters of wishes is vexed.[1] On their face, such documents appear to do no more than express a wish of the settlor of a trust. But reality belies that simplicity. Much judicial, academic and practitioner ink has been spilled over the question of what a trustee should do when presented with letters of wishes. Are they relevant? Are they binding? What weight should be attached to them. What if they are inconsistent with the terms of the trust? Or inconsistent with the purpose of the trust? And is there a difference between memoranda of wishes wished at inception of the settlement, or after? And what about those made in writing as compared to those passed down orally?
The short point for present purposes is that, at a minimum, letters of wishes are a relevant consideration that must be considered by the trustees when exercising their decision-making functions. To the extent that the trustees fail to do so, their decisions may be open to challenge.
Statutory regime
In New Zealand trust law is now principally governed by the Trusts Act 2019 (Act), which was a quasi-codification of the law relating to trusts. This legislative overhaul followed an in-depth review process undertake by the New Zealand Law Commission, which ultimately culminated in the publication of Review of the Law of Trusts: A Trusts Act for New Zealand.[2] The Act is intended to be the “primary source” of trust law in New Zealand,[3] but is not an “exhaustive code”.[4]
What is a trust?
An “express trust” is defined by s 12 of the Act to mean a trust that has the characteristics set out in section 13, complies with section 14 and is created in accordance with section 15. In turn these sections provide as follows:
1. Section 13: The characteristics of an express trust are as follows:
a. it is a fiduciary relationship in which a trustee holds or deals with trust property for the benefit of the beneficiaries or for a permitted purpose; and
b. the trustee is accountable for the way the trustee carries out the duties imposed on the trustee by law.
2. Section 14: A sole trustee of a trust must not be the sole beneficiary of the trust.
3. Section 15: An express trust may be created by a person, called the settlor, who clearly and with reasonable certainty:
a. indicates an intention to create a trust; and
b. identifies the beneficiaries (or classes of beneficiaries) or the permitted purpose of the trust; and
c. identifies the trust property.
The statutory definition is a blunter articulation of the definitions or descriptions of a trust given by the courts. The Supreme Court has recognised that “liabilities incurred by a trustee in relation to a trust are always the personal liability of the trustee” and this flows from the fact that a trust is “not a person but an equitable obligation to deal with property for the benefit of the beneficiaries”.[5]
A trustee holds legal title to property but is mandated to deal with that property in a certain way for the benefit of beneficiaries of the trust (the “certain way” will depend on the instrument constituting the obligations, namely the trust deed).[6] Legal and equitable title are divorced from one another,[7] and the trustee holds property encumbered by the obligations imposed by equity for an office of that kind.[8] This is the “duty or aggregate accumulation of obligations that rest upon a person described as a trustee”.[9]
By the divorce of legal and equitable title, the creation of a trust has been suggested to be the “equitable equivalent of a common law gift”.[10] By this it is meant that the settlor consensually yields up full control of the property in question and agrees it is held for the benefit of others. In undertaking such an action "it is fundamental that the creation of a trust involves the creation of new equitable obligations, which are 'annexed to the trust property' or 'engrafted' or 'impressed upon it”.[11] Thomas and Hudson say the following of the role of a settlor post-settlement:[12]
The role of settlor is simply that of creator. Once creation has taken place, then there is no evident role for the settlor in the operation of the trust in his capacity as settlor … . The settlor … drops from the picture absolutely and has no rights qua settlor, either to direct the trustees how to deal with the trust property or to reclaim the property which has been settled on trust.
Yet, this is in undeniable tension with the fact that absent the settlor the trust would not exist; it has been said that “the intention of the settlor is the chief reason justifying the existence of the trust”.[13]
The importance of the above to the present questions is that from the moment a trust is created, whether by settlement, declaration or operation of law:
1. equitable obligations are brought into being that did not exist antecedent to settlement;
2. the settlor loses beneficial control over the assets (even if they retain legal control); and
3. the settlor and any other trustees are bound by equity to deal with the property in accordance with the equitable settlement.
The relevance and application of any memoranda of wishes must, therefore, operate within this paradigm.
What are memoranda of wishes?
What exactly is meant by a memorandum or letter of wishes? They have been described as “a document addressed by a settlor to trustees which is not binding upon the trustees, but which indicates the settlor’s thoughts and wishes as to how the trustees might exercise their discretionary powers”,[14] and “a mechanism for the communication by a settlor to trustees of the settlement of non-binding requests by him to take stated matters into account when exercising their discretionary powers”.[15] In an Australian decision, such wish documents were described as “an essential component, or companion to, the trust deed itself”.[16] .The authors of Lewin on Trusts state that “[n]o particular formality is required to convey or record the settlor’s wishes”.[17] It is critical that in New Zealand the intrinsic concept of a memorandum of wishes does not demarcate between concurrent and subsequent memoranda of wishes. This is, however, a (soft) distinction drawn in the authorities that is necessary to bear in mind when considering obligations.
Interpreting trust deeds
The general obligations described above are always subject to modification by the trust settlement or deed. Subject only to the requirement that the irreducible core is not negatived such that a trust no longer exists. The irreducible core now arguably finds statutory vent in New Zealand in ss 22 to 27 of the Act, being the “mandatory duties” imposed on trustees.[18]
Determining the obligations incumbent on a trustee, including in relation to memoranda of wishes, requires intense focus on what the trust instrument actually says. It is settled law in New Zealand that trust deeds are interpreted in the same way as contracts.[19] In Holland v Jonkers the High Court summarised the principles in this way:[20]
1. In general, trust deeds are construed as per the ordinary rules of contractual interpretation.
2. More specifically, deeds are to be interpreted from a standpoint that is practical and purposive, rather than detached and literal. The factual matrix within which the relevant trust was formed is relevant.
3. A Court, when interpreting a trust deed, is required to construe each provision according to its natural meaning and give provisions ‘ample operation’ rather than approach interpretation in a narrow way or limited by reference to historical presumption.
4. The test of what is intended by the settlor or in the reasonable contemplation of the parties is an objective question, to be answered by ascertaining the actual meaning of words used in their context. The search for intention in relation to trusts, as with contracts, is for the intention as revealed in the words used by the parties. The expressed intention of the parties is to be found in the answer to the question, ‘what is the meaning of what the parties had said?’, not to the question ‘what did the parties mean to say?
5. Interpretation of trust deeds should be tailored having regard to the type of trust involved.
Relevant contractual interpretation principles – that apply to trust deeds
The leading cases on contractual interpretation in New Zealand are Firm PI Ltd v Zurich Australian Insurance Ltd, and Bathurst Resources Ltd v L & M Coal Holdings Ltd.[21] The principles from these cases can broadly be summarised in this way:
1. The approach to interpretation is objective and not subjective. The ultimate question is how would a reasonable person interpret the relevant instrument?
2. The written words have primacy, but are not wholly determinative.
3. The reasonable person is someone who is assumed to be seized of all relevant background knowledge reasonably available to the ‘parties’.
4. There is no hard limit on what amounts to “background” information, but it must be information that the above reasonable person would regard as capable of being relevant.
5. Both pre-contractual and post-contractual conduct can be relevant in determining the objective intention of the parties.
The added difficulties of trust deed interpretation
Ascertaining the context of a trust deed is more difficult than an agreement. The latter usually arise from bilateral negotiations and a meeting of the mind when parties are ad idem. The former can arise from a unilateral declaration of trust, or can arise from multilateral family discussions, including multi-generational succession planning.[22] The Act also makes clear that context is important to the interpretation of trust deeds, including the following provisions:
1. Section 4(a) that provides that “[e]very person or court performing a function or duty or exercising a power under this Act must have regard to [the principle that] … a trust should be administered in a way that is consistent with its terms and objectives”.
2. Section 5 confirms that the Act is to be supplemented by rules of common law and equity.
3. Section 9 defines the “terms” of a trust to include “express oral terms” and “implied terms” of the trust.
4. Section 21 states that “[i]n performing the mandatory duties … and the default duties … a trustee must have regard to the context and objectives of the trust”.
The issue of interpretation is discussed further below when considering the rationale underpinning wish documents.
Chambers v S R Hamilton Corporate Trustee Limited
The first is Chambers v S R Hamilton Corporate Trustee Limited.[23] S R Hamilton Corporate Trustee Limited and Lamb Trust Services Limited (the Trustees) were trustees of a trust settled on 7 November 2003 by Mr White Senior and his wife Zelpha.[24] Those companies were linked to long-time advisers of the settlors. The beneficiaries of the trust were the three children of the settlor. Following the death of Zelpha, Mr White executed two memoranda of wishes, and an addendum to the second memorandum of wishes dated 13 August 2006, 8 February 2010, and 10 May 2010.
Mr White Senior died on 9 July 2012. The major asset was a property that had been in the White family for almost 100 years. The final memorandum of wishes expressed a desire that all children should be able to benefit from his estate jointly, and that the property be sold to one of his children. The trustees obtained reports on the property. They disclosed it needed work. A decision was made to sell the property “as-is”. A valuation was obtained in that condition. On 16 June 2014 Mr Lamb of Lamb Trust Services Limited wrote to all beneficiaries saying “remediation of the leaks was not wise in the Trustees' view and, on the basis of expert advice, was not the sensible economic course. The letter advised, therefore, that the Trustees wished to sell the property without fixing the leaks. The letter gave notice to all three beneficiaries of the option to purchase the property for $945,000 and the option was to be exercised within one month and three days”.[25]
By late 2014 one child beneficiary was willing to buy on the terms proposed by the trustees. The other two were not willing to because they would not provide the indemnity sought in relation to weathertightness issues.
The two beneficiaries referenced above wrote to Mr Lamb’s firm enclosing a draft statement of claim seeking the trustees’ removal and replacement by the Public Trust. That proceeding was commenced in November 2014.[26] Around the same time the trustees commenced their own proceeding seeking sanction from the Court to sell the property to the willing beneficiary for the sum of $945,000. A series of unusual procedural orders flowed because of the uncertainty as to the kind of relief being sought.[27]
Part of the appeal centred on the memoranda of wishes (called memoranda of guidance).[28] The Court of Appeal summarised the law in this way:[29]
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.
The analysis of the case need not go farther than this for present purposes. However, it is important that the Court of Appeal took a contextual view of the memoranda of wishes, particularly the theme that Mr White Senior wanted all of his children to benefit equally.
Kain v Public Trust
The second significant case is Kain v Public Trust.[30] This case involved a continuation of decades-long litigation involving the trust-secured wealth of WAX (Tom) Couper. The two (discretionary) trusts at issue were the Waitaha and Middle Road Block Trusts. There were two broad categories of beneficiaries: the Kain siblings and grandchildren vs Mary Hutton (nee Kain) and the Hutton grandchildren. One issue was the applicability of memoranda of wishes.
The background to the litigation is in many ways distracting. For present purposes it is sufficient to note that the appellant alleged any wishes of the settlor should be disregarded due to hostility to one class of beneficiaries. On the other side it was alleged that the trustees must take into account the wishes of Mr Couper (including subsequent wishes) provided they are not inconsistent with the terms of the trust and its purpose.[31]
After summarising the law in detail, the Court of Appeal said the following in relation to memoranda of wishes:[32]
Public Trust is entitled to take into account the wishes and subsequent wishes of the settlor, Tom Couper, and to enable it to do so, it is necessary for Public Trust to read and understand those wishes. However, Public Trust can only take account of the wishes and subsequent wishes to the extent they are not inconsistent with the terms and purposes of the trust.
The Court of Appeal then went on to consider the status of subsequent wishes. The discussion started with the observation that “no New Zealand case has yet been directly required to expressly consider the status of subsequent or inconsistent wishes”.[33] The Court of Appeal agreed with the following statement of principle from Hartigan:[34]
There is, in my opinion, no distinction to be drawn between the views of a settlor expressed during the administration of the trust and those expressed before the constitution of it. Provided that the trustee is satisfied that views expressed before the constitution of the trust remain those of the settlor or would have been such, he may act upon or in accordance with those wishes.
In so agreeing, the Court of Appeal said that “[i]n principle there seems no reason why that should not be so”,[35] although the discretionary trust element appeared to assume some significance for that Court.[36] Further, there was the overarching qualifier that “[a]s is often the case, context and the individual circumstances of the particular case will determine the appropriate outcome”.[37]
Kain v Public Trust – Supreme Court
Leave was sought to appeal the above decision to the Supreme Court. That application was unsuccessful. Notably, the Supreme Court said this in rejecting the proposed appeal:[38]
The Court may wish at some point to consider the approach to subsequent wishes but, again, we do not see the current case as an appropriate vehicle for consideration of that topic.
The Supreme Court will likely have an even greater interest in this issue in light of the decision in Grand View.[39] There the Privy Council drew a distinction between contemporaneous and subsequent wishes as follows:[40]
There was some debate before the Board as to the extent to which external materials may be admissible in determining the purpose of a fiduciary power. It was common ground, and in the Board’s view correct, that documents which objectively inform the context of the instrument in question, such as in this case the WFT trust deed, are admissible, as are substantially contemporaneous documents which are intended to be read with the trust deed, such as a letter of wishes provided by the settlor or economic settlor (although there was no letter of wishes in this case). It was common ground that, while trustees could legitimately have regard to wishes later expressed by the settlor, or in this case the Founders, as to how the trustees should exercise their dispositive powers, such wishes were not admissible in determining the purpose of those powers.
[1] In New Zealand this kind of document is referred to as a memorandum of wishes (or memoranda in the plural) rather than a letter of wishes. They are the same document but in New Zealand most often take the form of a memorandum to the trustees, rather than a letter. They are occasionally referred to as “wish documents” in this paper. Other names include a statement of wishes, but this term is not frequently used in New Zealand.
[2] Law Commission Review of the Law of Trusts: A Trusts Act for New Zealand (NZLC R130, 11 September 2013).
[3] At [13].
[4] Trusts Act 2019, s 5(8)(a).
[5] AMP General Insurance Limited v Macalister Todd Phillips Bodkins [2006] NZSC 105, [2007] 1 NZLR 485 at [42]. See too J D Heydon and M J Leeming Jacob's Law of Trusts in Australia (7th ed, LexisNexis Butterworths, Australia, 2006) at [101]; Greg Kelly and Chris Kelly Garrow and Kelly Law of Trusts and Trustees (7th ed, LexisNexis NZ Ltd, Wellington, 2013) at [1.21]–[1.25]; Nicky Richardson and Lindsay Breach Nevill's Law of Trusts, Wills and Administration (12th ed, LexisNexis NZ Ltd, Wellington, 2016) at [1.1], citing Commissioner of Inland Revenue v Chester Trustee Services Limited [2003] 1 NZLR 395 (CA) at [37]; Wilmott v Johnson [2003] 1 NZLR 649 (CA) at [32].
[6] See Re Marshall's Will Trusts [1945] 1 All ER 550 at 551; Re Williams [1897] 2 Ch 12 at 18; AMP General Insurance Ltd v Macalister Todd Phillips Bodkins [2006] NZSC 105, [2007] 1 NZLR 485 at [42] (citations omitted).
[7] See Ayerst (Inspector of Taxes) v C & K (Construction) Limited [1975] 2 All ER 537 at 541; Hardoon v Belilos [1901] AC 118 (PC) at 123: "[a]ll that is necessary to establish the relation of trustee and cestuis que trust is to prove that the legal title was in the plaintiff and the equitable title in the defendant".
[8] See Harrison v Harrison HC Auckland CIV-2008-404-1270, 18 September 2008.
[9] See Re Scott [1948] SASR 193 at 196.
[10] L Tucker (ed) Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) at [1–005]. It is important to note, however, that the gift concept and trust concept are different, the latter not being dependent on consent of the donee, or indeed any act by the donee; gift principles do not apply to trusts: See Commissioner of Taxation v Carter [2022] HCA 10 at [41], citing Commissioner of State Revenue (WA) v Rojoda Pty Ltd (2020) 268 CLR 281 at 307 [44] (further citations omitted) and Maitland, Equity: also The Forms of Action at Common Law (1909) at 17-18; Maitland, Equity: A Course of Lectures, 2nd ed (1936) at 17.
[11] Commissioner of State Revenue (WA) v Rojoda Pty Ltd (2020) 268 CLR 281 at 307 [44], citing Chief Commissioner of Stamp Duties (NSW) v Buckle (1998) 192 CLR 226 at 243 [38]; Federal Commissioner of Taxation v Linter Textiles Australia Ltd (In liq) (2005) 220 CLR 592 at 606 [30]; DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties [1980] 1 NSWLR 510 at 519; on appeal (1982) 149 CLR 431 at 474; Re Transphere Pty Ltd (1986) 5 NSWLR 309 at 311. While these are Australian authorities, the premise is one of universal application.
[12] Geraint Thomas and Alastair Hudson The Law of Trusts (2nd ed, Oxford University Press, Oxford, 2010) at [1.37]–[1.38]. See too David Russell AM QC and Toby Graham “Letters of wishes and understanding the purposes of a trust” 25(3) Trusts & Trustees 277 at 280.
[13] John McGhee (ed) Snell’s Equity (33rd ed, London, Sweet & Maxwell, 2015) at 101.
[14] Re Rabaiotti 1989 Settlement [2000] JLR 173 at 185.
[15] Breakspear v Ackland [2008] EWHC 220 (Ch) (Breakspear) at [5].
[16] Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 at 419.
[17] Lynton Tucker and others Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) at [29-047].
[18] Armitage v Nurse [1998] Ch 241 (CA). See now Trusts Act 2019, ss 22 to 27.
[19] Ryan v Lobb [2021] NZHC 2219 at [20]; Edge v Bourke [2020] NZHC 1185, [2020] 3 NZLR 522 at [14]; and Marley v Rawlings [2014] UKSC 27, [2015] AC 124 at [19]-[23], Powell v Powell [2015] NZCA 133, [2015] NZAR 1886 at [53]. For many years the leading case was New Zealand Māori Council v Foulkes [2014] NZHC 1777, [2015] NZAR 1441 at [71]; citing Gosper v Sawyer (1985) 160 CLR 548 at 568—569; and Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253 at 286—290.
[20] Holland v Jonkers [2021] NZHC 3469 at [109].
[21] Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696; Firm PI Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432..
[22] See Manukau City Council v Lawson [2001] 1 NZLR 599 (HC) at [13]. See too Bulley v Attorney-General [2012] NZHC 615 at [51]; Byrnes v Kendle [2011] HCA 26, (2011) 243 CLR 253 at 286-290; New Zealand Māori Council v Foulkes [2014] NZHC 1777, [2015] NZAR 1441 at [71] (citations omitted).
[23] Chambers v S R Hamilton Corporate Trustee Limited [2017] NZCA 131, [2017] NZAR 882.
[24] At [2].
[25] At [6].
[26] At [9].
[27] At [16]–[23].
[28] At [36]–[38].
[29] At [36] (citations omitted) but referring to Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 (CA) at 431 and 445 per Mahoney and Sheller JA; Futter v Futter [2013] UKSC 26, [2013] 2 AC 108 at [66]; David Hayton (ed) Underhill and Hayton Law of Trusts and Trustees (19th ed, LexisNexis, London, 2016) at [4.11].
[30] Kain v Public Trust [2021] NZCA 685, (2021) 5 NZTR 31-020.
[31] At [82].
[32] At [136], citing cases such as Chambers v S R Hamilton Corporate Trustee Limited [2017] NZCA 131, [2017] NZAR 882; Easton v New Zealand Guardian Trust Company Ltd (No 3) [2021] NZHC 2084, (2021) 5 NZTR 31–019; Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 (NSWCA) at 431; Breakspear v Ackland [2008] EWHC 220 (Ch), [2008] 3 WLR 698; Pitt v Holt [2013] UKSC 26, [2013] 2 AC 108 at [66]; Lynton Tucker and others Lewin on Trusts (20th ed, Sweet & Maxwell, London, 2020) at [29-046].
[33] At [137].
[34] At [145], citing Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405 (NSWCA) at 431.
[35] At [146].
[36] At [147].
[37] At [147].
[38] Kain v Public Trust [2022] NZSC 65, (2022) 5 NZTR 32-006 at [17].
[39] Grand View Private Trust Co Ltd v Wong [2022] UKPC 47.
[40] At [63].