Bermuda: Part Three: Beneficiaries' Access To The Letter Of Wishes

This final essay in the mini-series on letters of wishes in discretionary trusts addresses the beneficiaries' access to the settlor's letter of wishes in two respects: (i) the beneficiaries' entitlement to disclosure outside of litigation (including the extent of the trustee's discretion in light of the settlor's expectation of confidentiality and the circumstances in which the trustee will be obliged to give disclosure); and (ii) disclosure to the beneficiaries in the litigation context.

(i) The beneficiaries' entitlement to disclosure outside of litigation

Beneficiaries are entitled to various information and documents in relation to the trust – including in relation to the value of the trust assets and the ways in which those assets have been dealt with – but they are not entitled to information or documents in relation to the trustee's reasons for exercising its discretion in a particular way or for choosing not to exercise its discretion.¹ It is a well-established legal principle 'that the process of the exercise of discretionary dispositive powers by trustees is inherently confidential, and that this confidentiality exists for the benefit of the beneficiaries rather than merely for the protection of the trustees.'²

Given the contents of the letter of wishes might shed light on the trustee's reasoning, there is no automatic entitlement on the part of the beneficiaries to disclosure outside the litigation context. The starting point is that the letter of wishes is generally confidential as between the trustee and the settlor. Whether that confidentiality should be lifted, and the letter of wishes disclosed to a requesting beneficiary, 'should be addressed primarily upon an assessment of the objective consequences, rather than by reference to the subjective purpose for which disclosure is alleged to be sought.'³ The question of whether a beneficiary is entitled to disclosure of the settlor's letter of wishes is a matter of discretion, rather than a proprietary right;⁴ the trustee may choose to disclose the letter of wishes if it considers it to be in the best interests of the beneficiaries and the due administration of the trust to do so, but it cannot generally be compelled to do so unless either the exercise of its discretion not to disclose can be successfully challenged (e.g. because it failed to take into account relevant considerations pointing in favour of disclosure) or the Court can be persuaded to order disclosure as part of its supervisory jurisdiction.

Per Briggs J (as he then was) in Breakspear v Ackland:⁵

'The defining characteristic of a wish letter is that it contains material which the settlor desires that the trustees should take into account when exercising their (usually dispositive) discretionary powers. It is therefore brought into existence for the sole purpose of serving and facilitating an inherently confidential purpose. It seems to me axiomatic that a document brought into existence for the sole or predominant purpose of being used in furtherance of an inherently confidential process is itself properly to be regarded as confidential, to substantially the same effect as the process which it is intended to serve.'

As to the scope of this confidentiality:

'In the absence of special terms, the confidentiality in which a wish letter is enfolded is something given to the trustees for them to use, on a fiduciary basis, in accordance with their best judgment and as to the interests of the beneficiaries and the sound administration of the trust. Once the settlor has completely constituted the trust, and sent his wish letter, it seems to me that the preservation, judicious relaxation or abandonment of that confidence is a matter for the trustees or, in an appropriate case, for the court.'⁶

What, then, of the settlor who seeks to preserve confidentiality by the inclusion of a special term to this effect? The Court of Appeal for Bermuda had cause to consider this in the case of Re A Trust.⁷ The case on its facts did not concern a letter of wishes, but the Court's analysis of the issues is nevertheless interesting for present purposes and the authors suggest that a similar approach would likely be taken in relation to letters of wishes. Of course, in relation to trust documents (and unlike letters of wishes), the starting point is that beneficiaries are entitled to disclosure. The special term in the trust deed in Re A Trust purported to change that, requiring the trustee first to obtain written consent from the protector (who was also a 65% beneficiary) and prohibiting disclosure in the event that such consent was not forthcoming.

The special term, which was described as an "information control mechanism", provided as follows:

'except to the extent that the Trustees (with the prior written consent of the Protector) in their discretion otherwise determine no person or persons shall be provided with or have any claim right or entitlement during the Trust period to or in respect of accounts (whether audited or otherwise) or any information of any nature in relation to the Trust Fund or the income thereof or otherwise in relation to the Trust or the trusts powers or provisions thereof (and whether from the Trustee or otherwise).'⁸

The Court found that this information control mechanism did not oust the supervisory jurisdiction of the Court; that the protector had to exercise its power in the interests of the trust and its beneficiaries; that the Court retained the power to order disclosure to an individual beneficiary if it was considered justified in the circumstances; and the Court's power was not limited to reviewing a decision made by the trustee or by the protector.⁹

Expanding this analysis to a settlor's confidential letter of wishes, Re A Trust suggests that any attempt to achieve absolute confidentiality in respect of the settlor's letter of wishes – even by the inclusion of a special term in the trust deed – would be unsuccessful. This accords with the observation of Briggs J in Breakspear v Ackland:

'Although this may be a matter to be decided on another occasion, I am not persuaded that it is either appropriate or legitimate for a settlor to fetter the trustees' discretion in that respect [i.e. in relation to the confidentiality of the letter of wishes], either by the inclusion of special terms as to confidentiality in the wish letter itself or, still less, on any subsequent occasion.'¹⁰

Lewin on Trusts notes, however, that 'the fact remains that much weight attaches to the claim for confidentiality which may be overridden only where this is needed in the interests of the sound administration of the trust, and the discharge of the trustees' powers and discretions.'¹¹ This suggests that, whilst the settlor cannot achieve absolute confidentiality, the starting point will nevertheless be that the letter of wishes is to remain confidential and that the trustee must have a good reason to depart from this. In the authors' view, this has to be right. The trustee cannot act capriciously or irrationally¹² and therefore must have due regard for the settlor's intention that the letter of wishes should be confidential, overriding that confidentiality only where the trustee has taken a considered and rational decision to do so in the interests of the trust and its beneficiaries.

Even if the trustee decides to exercise its discretion to disclose the letter of wishes, or else the beneficiary establishes an entitlement to disclosure, there are still likely to be limitations on the beneficiary's ability to use the document. Indeed, the document itself may even be provided in redacted form:

'Disclosure of the settlor's letter of wishes should be made on the basis of appropriate confidentiality undertakings and, perhaps, in redacted form so far as it relates to other beneficiaries and is not, or not substantially, relevant in relation to the rights under the trust of the beneficiary seeking disclosure, or contains personal confidential information about other beneficiaries.'¹³

(ii) Disclosure to the beneficiaries in the litigation context

In the event of a dispute between the trustee and the beneficiaries – for example, a challenge to the exercise of the trustee's discretion – the letter of wishes may fall to be disclosed as part of the litigation in the usual way. In such circumstances, the beneficiaries' entitlement to the letter of wishes is based on the beneficiaries' status as litigants, not their status as beneficiaries. This possibility was noted in Breakspear v Ackland:¹⁴

'The third category of case in which the question of disclosure may arise is in the context of existing litigation about an issue in respect of which the wish letter is alleged to be a relevant document. In that context, disclosure of wish letters is merely an aspect of the general law and practice as to disclosure. Generally speaking, relevance and necessity are the governing criteria and confidentiality plays a very subordinate role. It is tempting to think that, because a determined beneficiary might circumvent the obstacle of confidentiality by litigating an issue to which the wish letter was said to be relevant, confidentiality could in truth be nothing but a temporary rearguard to cover a slow retreat by the trustees. But English law has developed a robust approach to "fishing" litigation of that kind.'

Bermudian law has developed a similarly robust approach. A beneficiary would not be able to obtain a letter of wishes through the backdoor by commencing spurious litigation with the sole intention of getting disclosure of the letter of wishes. If, however, there is a genuine dispute being litigated between the beneficiaries and the trustee, the letter of wishes may (and likely will) fall to be disclosed in the course of the proceedings. The scope of a party's disclosure obligations in the context of litigation is beyond the scope of this essay. Suffice it to say for present purposes that confidentiality is not a bar to disclosure, such that neither the trustee nor the settlor could hide behind the confidentiality of the letter of wishes as a reason to avoid giving disclosure of the letter in the course of litigation. In Bermuda, it is common practice for trust proceedings to take place in chambers (rather than in open court) and subject to appropriate provisions in relation to anonymity. This practice would no doubt provide comfort to a settlor who was concerned about the disclosure of his letter of wishes in the litigation context.

Footnotes

1. See: Re Londonderry's Settlement [1965] Ch 918

2. Breakspear v Ackland [2009] Ch 32 at [24], referring to 'the Londonderry principle', derived from Re Londonderry's Settlement, ibid., which remains good law.

3. Breakspear v Ackland, op. cit. (n 2) at [51].

4. Ibid. at [52].

5. Ibid. at [58]

6. Ibid. at [62].

7. Re A Trust BM 2014 CA 1

8. Ibid. at [13].

9. Ibid. at [45].

10. Op. cit. (n 2) at [63].

11. Lynton, T., Le Poidevin, N., and Brightwell, J., (2020) Lewin on Trusts, (20^th ed.). London, Sweet & Maxwell, at § 21-073

12. Ibid. at § 29-035

13. Ibid. at § 21-074

14. Op. cit. (n 2) at [13]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Kennedys operates in Bermuda in association with Kennedys Chudleigh Ltd.