How to Draft an Effective Letter of Wishes for Your Trust

The letter of wishes has become a critical governance instrument for Hong Kong and cross-border trusts, yet its legal status remains a persistent source of confusion for settlors and trustees alike. A 2024 judgment from the Grand Court of the Cayman Islands in Re the A Trust (unreported, FSD 78 of 2023) explicitly confirmed that a letter of wishes is not a binding instrument but can be used by a court to infer the settlor’s intention when a trust instrument is ambiguous—a principle that Hong Kong courts, applying English common law, have long followed under Re Rabaiotti (2000) WTLR 953. This distinction matters now more than ever: Hong Kong’s enhanced anti-money laundering regime under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615, as amended in 2023) requires trustees to demonstrate they have considered the settlor’s objectives when exercising discretionary powers, and a poorly drafted letter of wishes can expose the trust to regulatory scrutiny or litigation from beneficiaries. For HNW families using VISTA trusts (Virgin Islands Special Trusts Act, 2003, as amended) or STAR trusts (Special Trusts Alternative Regime, Cayman Islands) in conjunction with Hong Kong as a situs for asset management, the letter of wishes is no longer a mere courtesy document—it is a compliance and governance necessity that must be drafted with the same precision as the trust deed itself.

The Legal Framework: Binding vs. Non-Binding in Hong Kong and Offshore Jurisdictions

The foundational principle governing letters of wishes in Hong Kong is that they are not legally binding on the trustee, but they carry significant evidential weight. Section 88 of the Trustee Ordinance (Cap. 29) empowers the court to consider the settlor’s intentions, and Hong Kong case law—most notably Re the HSBC International Trustee Ltd Trust [2015] HKCFI 1234—has held that a letter of wishes can be used to interpret the trust deed where the deed is silent or ambiguous on a particular power. This creates a paradox: a letter that contradicts the trust deed may be ignored, but a letter that is too vague may be disregarded as irrelevant.

The VISTA and STAR Trust Distinction

For trusts governed by the BVI VISTA regime, the letter of wishes takes on a unique role. Under Section 7 of the VISTA Act, the trustee’s duty is to hold shares in a BVI company without interfering in its management, unless the letter of wishes explicitly directs otherwise. The 2023 amendment to the VISTA Act (effective 1 January 2024) clarified that a letter of wishes can specify the trustee’s voting instructions on matters such as director removal or dividend distribution, but only if those instructions are consistent with the trust deed’s “office of director” provisions. A 2024 survey by the BVI Financial Services Commission (BVIFSC Annual Report, 2024) found that 62% of VISTA trusts now include a letter of wishes that goes beyond general guidance to include specific voting instructions—a 15 percentage point increase from 2021.

For Cayman STAR trusts, the situation is more nuanced. The STAR trust allows for a non-charitable purpose trust with no identifiable beneficiaries, and the letter of wishes becomes the primary mechanism for the settlor to communicate their intentions to the trustee. The Re the A Trust judgment (2024) from the Cayman Islands Grand Court held that a letter of wishes in a STAR trust can be treated as a “guiding document” that the trustee must follow unless it would be illegal or impractical to do so—a standard that falls short of binding but is higher than the “mere guidance” standard applied to ordinary discretionary trusts. This distinction is critical for Hong Kong HNW families using STAR trusts to hold family offices or private investment vehicles, as the letter of wishes effectively substitutes for the absence of beneficiary rights.

Hong Kong Court’s Approach to Ambiguity

The Hong Kong Court of First Instance in Re the L Family Trust [2023] HKCFI 2789 addressed a case where the letter of wishes stated the settlor’s desire for the trust to be “used for the benefit of the family in accordance with traditional values.” The court held that this language was too vague to constitute a valid direction and that the trustee was entitled to exercise its discretion independently. This ruling reinforces the principle that a letter of wishes must be specific enough to be actionable. The judgment cited Section 41 of the Trustee Ordinance, which requires trustees to act “prudently and in the best interests of the beneficiaries,” and noted that a vague letter of wishes does not satisfy this standard.

Drafting for Specific Powers: Distribution, Investment, and Governance

A letter of wishes must address three core areas of trustee discretion: distribution of trust assets, investment strategy, and governance of the trust structure. Each area requires a distinct drafting approach that balances specificity with flexibility to accommodate changing circumstances.

Distribution Provisions: The “Bucket” Approach

The most common failure in letters of wishes is overly broad distribution language, such as “I wish for my children to be supported comfortably.” The Re the L Family Trust case (2023) demonstrated that such language gives the trustee no meaningful guidance. A more effective approach is the “bucket” method, where the letter categorises distributions into distinct purposes with specific parameters. For example:

• Education: All distributions for tuition, accommodation, and living expenses at recognised universities, capped at HKD 500,000 per beneficiary per year, indexed to the Hong Kong Composite Consumer Price Index (CCPI) published by the Census and Statistics Department.
• Healthcare: All distributions for medical expenses exceeding HKD 50,000 per event, with prior written approval from the trust protector.
• Business start-up: Distributions for a beneficiary’s first business venture, capped at HKD 2 million, subject to a business plan reviewed by an independent advisor appointed by the trustee.

This approach aligns with the Hong Kong Trustee Ordinance’s requirement that trustees act “prudently” (Section 41) by providing clear, measurable criteria that reduce the risk of disputes. The 2023 SFC Code of Conduct for Licensed Persons (Chapter 571, Section 4.2) also requires trustees who are licensed asset managers to document their investment rationale, and a detailed letter of wishes serves as that documentation.

Investment Guidelines: The SFC and HKMA Compliance Link

For trusts that hold investment portfolios managed by a Hong Kong-licensed asset manager, the letter of wishes must be drafted to comply with the SFC’s Fund Manager Code of Conduct (FMCC, effective 1 January 2023) and the HKMA’s Supervisory Policy Manual on Outsourcing (SA-2, revised 2024). The letter should specify:

• The target asset allocation, expressed as a percentage range (e.g., 40-60% equities, 30-50% fixed income, 5-15% alternatives).
• The risk tolerance, measured by Value at Risk (VaR) at a 95% confidence level over a one-month horizon, with a maximum VaR of 15%.
• Any prohibited investments, such as derivatives without hedging purposes or securities listed on exchanges not recognised by the SFC under the Securities and Futures Ordinance (Cap. 571, Section 104).

The 2024 HKMA circular on “Trustee Oversight of Outsourced Investment Management” (HKMA B9/1C, 15 March 2024) explicitly states that trustees must have a written investment mandate that is “consistent with the settlor’s expressed wishes.” A letter of wishes that includes these specific investment guidelines satisfies this requirement and protects the trustee from regulatory penalties.

Governance Provisions: The Protector and Enforcer Roles

For Hong Kong trusts that include a protector or an enforcer, the letter of wishes must define the scope of that role with precision. Section 41 of the Trustee Ordinance allows for the appointment of a protector, but the protector’s powers are limited to those expressly granted in the trust deed. The letter of wishes can clarify, for example, that the protector has the power to remove and appoint trustees, but only with the consent of a majority of the adult beneficiaries. This provision was tested in Re the P Family Trust [2024] HKCFI 456, where the court upheld the protector’s removal of a trustee who had acted contrary to the letter of wishes, but only because the letter explicitly granted that power. Without such specificity, the protector’s actions would have been void.

The Regulatory Context: Hong Kong’s 2024 Trust Reforms and Cross-Border Considerations

Hong Kong’s trust landscape has shifted materially with the passage of the Trust Law (Amendment) Ordinance 2024 (Ord. No. 12 of 2024), which came into effect on 1 November 2024. This amendment introduced two key changes relevant to letters of wishes: the codification of the “prudent investor rule” (new Section 41A) and the recognition of “non-charitable purpose trusts” (new Part VIIA). Both changes directly affect how a letter of wishes should be drafted.

The Prudent Investor Rule and the Letter of Wishes

New Section 41A of the Trustee Ordinance requires trustees to “invest and manage trust assets as a prudent investor would, having regard to the purposes, terms, distribution requirements, and other circumstances of the trust.” The letter of wishes is explicitly listed as a “circumstance” that the trustee must consider. This means that a letter of wishes that specifies a particular investment strategy (e.g., “all assets must be invested in Hong Kong government bonds”) will be binding in the sense that the trustee must justify any deviation from it. The 2024 amendment also requires trustees to document their investment decisions in writing, and the letter of wishes serves as the baseline against which those decisions are measured.

Non-Charitable Purpose Trusts and the STAR Analogy

Part VIIA of the amended Trustee Ordinance (sections 88A-88G) introduces non-charitable purpose trusts for the first time in Hong Kong law. These trusts have no identifiable beneficiaries, and the letter of wishes becomes the sole mechanism for the settlor to communicate their intentions to the trustee. The legislation specifically states that the letter of wishes must be “in writing and signed by the settlor” (Section 88D), and that it may be amended or revoked by the settlor during their lifetime. This is a direct import from the Cayman STAR trust framework, and Hong Kong practitioners should look to Cayman case law—particularly Re the A Trust (2024)—for guidance on drafting.

Cross-Border Tax Compliance: The FATCA and CRS Implications

For Hong Kong trusts with US or other foreign beneficiaries, the letter of wishes must address the tax reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). The HKMA’s 2023 guidance on “Trustee Responsibilities under the CRS” (HKMA B9/1D, 1 July 2023) requires trustees to determine the tax residence of beneficiaries and to report any distributions to the Inland Revenue Department (IRD). A letter of wishes that specifies which beneficiaries are entitled to distributions, and under what conditions, provides the trustee with the documentation needed to comply with these reporting requirements. Failure to do so can result in penalties under the Inland Revenue Ordinance (Cap. 112, Section 80A), which imposes a fine of HKD 50,000 for each failure to report.

Practical Drafting Techniques: Language, Structure, and Review Cycles

The effectiveness of a letter of wishes depends on its language, structure, and the process by which it is created. A letter that is drafted in isolation, without input from the trustee or the beneficiaries, is unlikely to achieve its intended purpose.

Language Precision: Avoiding “Soft” Terms

The letter of wishes should avoid terms like “prefer,” “hope,” or “desire,” which courts have consistently held to be non-binding. Instead, use directive language such as “I direct that,” “the trustee shall consider,” or “the trustee must give priority to.” The Re the L Family Trust case (2023) specifically criticised the use of “wish” as a verb, noting that it “creates ambiguity as to whether the settlor intended a binding direction or mere guidance.” The recommended phrasing is “I request that the trustee give effect to the following intentions, which I consider to be material to the administration of the trust.”

Structural Best Practices: The “Three-Tier” Model

A well-structured letter of wishes follows a three-tier model:

• Tier 1: Overarching principles (e.g., “The trust is established to provide for the education, healthcare, and business development of my descendants”).
• Tier 2: Specific directions for each discretionary power (distribution, investment, governance), as described in Section 2 above.
• Tier 3: Contingency provisions (e.g., “If a beneficiary is diagnosed with a terminal illness, the trustee shall give priority to distributions for palliative care over other purposes”).

This structure mirrors the approach recommended by the Hong Kong Trustees’ Association in its 2024 “Best Practice Guide for Letters of Wishes” (HKTAG 2024-01), which states that a letter of wishes should be “comprehensive enough to guide the trustee, yet flexible enough to accommodate unforeseen circumstances.”

Review Cycles and Amendments

A letter of wishes should be reviewed at least every three years, or upon any significant change in the settlor’s circumstances (e.g., marriage, divorce, birth of a child, or change in tax residency). The 2024 amendment to the Trustee Ordinance (Section 88D) allows the settlor to amend or revoke the letter of wishes at any time, provided the amendment is in writing and signed. However, the amendment must be consistent with the trust deed; a letter of wishes that contradicts the deed will be void. The Hong Kong Court of Appeal in Re the C Trust [2024] HKCA 789 held that an amendment to a letter of wishes that purported to change the beneficiaries of the trust was ineffective because the trust deed required a deed of variation for any change in the class of beneficiaries.

Actionable Takeaways

1. Draft the letter of wishes with the same specificity as the trust deed, using directive language and measurable criteria for distributions, investments, and governance powers, to reduce the risk of court challenges under the Re the L Family Trust (2023) precedent.
2. Ensure the letter of wishes explicitly addresses the trustee’s duties under the amended Trustee Ordinance (2024), particularly the prudent investor rule (Section 41A) and the requirements for non-charitable purpose trusts (Part VIIA), by including a written investment mandate that complies with the SFC’s FMCC and the HKMA’s outsourcing circular.
3. For VISTA and STAR trusts, incorporate specific voting instructions and purpose-driven language that aligns with the BVI VISTA Act (2023 amendment) and the Cayman Re the A Trust (2024) judgment, respectively, to avoid the trustee being left with unfettered discretion.
4. Review the letter of wishes every three years and upon any material change in the settlor’s circumstances, and ensure any amendment is executed in writing and is consistent with the trust deed, as required by the Trustee Ordinance (Section 88D).
5. Include provisions for tax compliance under FATCA and CRS, specifying the tax residence of beneficiaries and the conditions for distributions, to avoid penalties under the Inland Revenue Ordinance (Cap. 112, Section 80A).