A Letter of Wishes: No Legal Power But Powerful Nonetheless

A man, only his hands a shirt showing, writes a letter.

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Over the years, I’ve seen many estate plans that have been well crafted and tax-optimized fail when it comes to the one thing that matters most: leaving heirs better off for their inheritance.

Contributing to this is poor or little guidance for the trustees and little thought given to the damage that sudden wealth can cause. You need not look further than the statistics of lottery winners to see the failures caused by unexpected and rapid access to money.

What do you want to achieve with what you leave behind? And how can you prepare your trustees and heirs for this responsibility?

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Generational wealth is a magnifying glass. It can amplify the best in us. It can also exaggerate fault lines of misunderstanding and lead to resentment.

Most parents want the same thing for their children: to be happy and healthy and to love one another. The problem is that your intentions are very hard to push through legal trust documents and emerge on the other side in a way that is clear for a trustee to interpret. These documents can be rigidly defined, costly to change and difficult for a layperson to understand.

But it doesn’t have to be this way. There is actually a little-known “cheat code” that anyone can use to restore flexibility to estate planning and communicate in a way you and your loved ones can all understand. It’s called a letter of wishes.

What a letter of wishes can do

In the simplest terms, a letter of wishes is a statement of the intention behind the decisions you make in your estate plans. It is not a legally binding document, but its power lies in its simplicity. You can write, in plain language, the outcomes you want to see for your heirs. It allows you to speak to the “why” behind your plan in a way that a document full of legalese might not be able to capture.

For example, your trust documents might say a portion of a beneficiary’s funds are to be used for education. However, the trustee needs to decide what “counts” as education. Would trade school count? What about art classes, violin lessons or studies abroad? Your letter of wishes can answer these questions for them. Without it, the trustee has to make a judgment call, creating a potential trigger point for a bitter dispute over the use of your inheritance.

Moreover, dividing your assets among your three children may seem fair and equitable, but what happens if one child has one grandchild, and one has 10 grandchildren? Are you comfortable with one grandchild inheriting 10 times what the other 10 grandchildren inherit? Or is your intent to treat them all equally, providing funds for the things important to you, such as education, some help with housing and enough to do something, but not so much that they can do nothing? Does a stipend make more sense for all of your heirs rather than making your estate planning problem their estate planning problem?

There is no standardized format for a letter of wishes, but the households I have worked with tend to use a few common elements in their letters. You can state your overall intent for using trust funds and what is most important. You can explain the cadence of distribution to beneficiaries or offer guidance to trustees for large distributions meant for specific purposes, like starting a business or a buying a home. You can clarify whether certain beneficiaries should be considered priorities over others.

Giving context to your legacy

Most of all, you can give context to your legacy. If your beneficiaries are treated differently in your estate documents, they could perceive that as cruel or capricious. A letter of wishes lets you set the record straight. In a very real way, it may be your last opportunity to do so. After you’re gone, the only thing that your family and your trustee have to guide the discretionary matters of your estate is what you set in place while you still had time.

Put another way, a trust document will tell your inheritors the terms and conditions of your estate. A letter of wishes can say to them, “Don’t forget where you came from.”

And because a letter of wishes is not a legal document, it is not subject to the same legal costs to draft and strictures as the rest of your estate documentation. You can update a letter of wishes far more quickly and easily and with less hassle than formal trust documents.

No matter how much or little we leave behind, we all want our beneficiaries to live well and be happy. A letter of wishes is one of the best tools to prevent your estate from becoming the flashpoint of bitter disputes or lifelong divides among your heirs. It allows you to leave behind a purpose, not just assets.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Steve Lockshin is an entrepreneur and financial adviser. He is a Principal of AdvicePeriod and a co-founder of estate planning software firm Vanilla. Steve founded Vanilla with the mission of empowering advisors to deliver more impactful, client-centric estate planning advice. By providing intuitive tools to create, manage and visualize estate plans, Vanilla enables advisers to better demonstrate their value and forge deeper relationships with clients.