Letters of Wishes and Trust Protectors in Hong Kong Private Wealth Planning

Introduction

A discretionary trust is one of the most flexible and powerful tools available in private wealth planning. The trustee of a discretionary trust holds assets for the benefit of a class of potential beneficiaries and has the discretion to decide how, when, and to whom trust distributions are made. This flexibility is one of the trust's greatest strengths — but it also raises an important question: how can a settlor guide the trustee's exercise of that discretion, and how can the settlor ensure that the trust is administered in accordance with their wishes, particularly after their death or loss of capacity?

Two tools address this question: the letter of wishes and the trust protector. This guide explains the role of each, their legal status in Hong Kong, best practices for their use, and their importance in effective private wealth planning.

Letters of Wishes

What Is a Letter of Wishes?

A letter of wishes (also known as a memorandum of wishes or a letter of guidance) is a document written by the settlor of a trust that expresses their wishes and preferences for how the trustee should exercise its discretionary powers. The letter might address questions such as which beneficiaries the settlor considers should receive distributions, how the trust assets should be invested, how to handle distributions for particular purposes (such as education or business ventures), and how beneficiaries should be treated if there is conflict among them.

Legal Status: Guidance, Not a Command

A critical feature of a letter of wishes is that it is not legally binding on the trustee. Unlike the trust deed — which is a legally binding document that governs the trustee's powers and obligations — a letter of wishes is an expression of guidance. The trustee must take the letter of wishes into account and give it appropriate weight, but the trustee is not obliged to follow it and cannot abdicate its own independent judgment in favour of the settlor's instructions.

If a trustee were to treat a letter of wishes as a binding instruction and simply follow it without exercising independent judgment, this could itself be a breach of trust (sometimes referred to as "delegation of discretion to the settlor"). The trustee must always exercise its own discretion, informed by but not dictated to by the letter of wishes.

Conversely, a trustee that ignores a letter of wishes entirely, without good reason, may be acting improperly. Courts have noted that trustees should engage meaningfully with letters of wishes as part of their decision-making process.

Disclosure of Letters of Wishes to Beneficiaries

The question of whether beneficiaries are entitled to see a letter of wishes is one of the most complex and contested areas of Hong Kong trust law. The general position — following decisions of the Privy Council and the Hong Kong Court of Final Appeal — is that a letter of wishes is not a trust document to which beneficiaries have an automatic right of disclosure. However, the trustee has a duty to consider whether to disclose the letter to beneficiaries in the exercise of its discretion, and in some circumstances may be required to do so.

This ambiguity can create tension in family trusts, particularly where one beneficiary suspects that the trustee's decisions are being unduly influenced by a letter of wishes that favours another. Settlors and trustees should consider carefully whether the letter of wishes should be kept confidential or shared, and in what circumstances.

Drafting Effective Letters of Wishes

A well-drafted letter of wishes is a powerful aid to the trustee and ensures that the settlor's intentions are clearly communicated. Key principles include:

• Be specific but flexible: The letter should provide enough detail to genuinely guide the trustee, but should avoid being so prescriptive that it effectively dictates decisions or becomes impossible to follow as circumstances change
• Address key scenarios: Consider the principal scenarios that the trustee may face — distributions for education, housing, or business purposes; the treatment of beneficiaries with special needs; what happens if beneficiaries become estranged from the family; the position on trustee investment strategy
• Review and update regularly: A letter of wishes should be reviewed and updated periodically — particularly after major life events such as the birth of grandchildren, a change in a beneficiary's circumstances, or a significant shift in the family's values or priorities
• Avoid conflicts with the trust deed: The letter of wishes must be consistent with the terms of the trust deed. A letter that purports to override or modify the trust deed is legally ineffective
• Maintain confidentiality appropriately: Settlors should consider whether they want the letter of wishes to be disclosed to beneficiaries (either during their lifetime or after death) and should communicate this preference clearly to the trustee

Trust Protectors

What Is a Trust Protector?

A trust protector is a person (individual or entity) who is appointed under the trust deed with specific powers over the trustee or the trust's administration. The protector concept originated in offshore trust practice but has become increasingly common in Hong Kong and English law trusts as settlors seek additional oversight mechanisms beyond those provided by the courts and the trustee's own governance.

Unlike a letter of wishes — which has no legal binding force — the powers of a trust protector are conferred by the trust deed and are legally enforceable. The trust deed will specify what powers the protector holds, and the trustee cannot exercise certain specified powers without the protector's consent.

Common Protector Powers

The powers granted to a trust protector vary widely depending on the settlor's objectives and the structure of the trust. Common protector powers include:

• Power to remove and replace trustees: Allowing the protector to replace an underperforming or untrustworthy trustee without the need for court proceedings
• Power to approve or veto distributions: Particularly for significant capital distributions, requiring the trustee to obtain protector consent
• Power to add or remove beneficiaries: Allowing the class of beneficiaries to be expanded or reduced in light of changed circumstances
• Power to approve or veto investments: Giving the protector oversight of major investment decisions
• Power to amend the trust deed: Allowing the trust to be updated to reflect changes in law or family circumstances
• Power to change the governing law: Allowing the trust to migrate to a different jurisdiction if circumstances change

The Nature of the Protector's Position

The legal characterisation of the protector's role — whether they are a trustee, an agent, or a fiduciary in their own right — has been the subject of significant academic and judicial debate. The position under Hong Kong law, following English authorities, is that a protector holding dispositive powers (such as a power to add beneficiaries or approve distributions) is likely to be characterised as a fiduciary who must exercise those powers in good faith, for proper purposes, and in the interests of the beneficiaries — not for personal benefit.

This means that a protector cannot simply veto a distribution because they personally disagree with it or because it benefits a beneficiary they dislike — they must exercise their powers for proper trust purposes.

Choosing a Protector

The choice of protector is one of the most important decisions in the design of a trust. A protector should be:

• A person (or entity) trusted by the settlor to act in the long-term interests of the family
• Capable of understanding and engaging with the trust's investment and administrative decisions
• Available and willing to act over the long term
• If possible, geographically accessible to the trustee and the beneficiaries

Common choices for protector include a trusted family friend, the settlor's accountant or financial adviser, a family office, a professional trustee company, or a committee of family members. Corporate protectors are increasingly popular for long-duration trusts, as they provide continuity that individual protectors cannot.

How Alan Wong LLP Can Help

Alan Wong LLP advises settlors, trustees, protectors, and beneficiaries on all aspects of trust governance in Hong Kong. Our services include:

• Advising settlors on the use of letters of wishes and the design of protector structures
• Drafting and reviewing letters of wishes and trust deeds containing protector provisions
• Advising trustees on the weight to be given to letters of wishes in their decision-making
• Advising protectors on the exercise of their powers and their fiduciary duties
• Acting in trust disputes involving allegations that trustees have failed to have proper regard to letters of wishes, or that protectors have acted improperly

Conclusion

Letters of wishes and trust protectors are complementary tools that give settlors meaningful — if legally distinct — influence over the administration of their trusts. A letter of wishes provides non-binding guidance that a trustee must consider; a protector provides legally enforceable oversight powers. Together, they form a robust governance framework that can help ensure a trust is administered in accordance with the settlor's intentions over the long term, even as family circumstances evolve and the settlor is no longer present to provide guidance directly.

This article is for general information purposes only and does not constitute legal advice. For advice on trust governance and private wealth planning, please contact Alan Wong LLP.