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If you’re considering setting up a trust, you’re probably already aware of the many financial and business benefits that they bring. However, choosing the right trust structure is crucial to ensure that you are making the right choice for your business plans. The two main trust structures are unit trusts and discretionary trusts. While they have similarities, understanding their differences is crucial when choosing to set up a trust. This article will set out the key differences between discretionary and unit trusts.

What is a Trust?

A trust is a relationship where controller of the trust (the trustee) holds the legal title to assets for the benefit of individuals or companies that are parties to the trust. These individuals or companies are known as the beneficiaries. The trustee has a responsibility to administer the assets of the trust (the trust fund) to the beneficiaries in accordance with the trust’s governing document (the trust deed).

How Long Does a Trust Last?

A trust runs for the period specified in the trust deed. This is usually for 80 years –  the maximum time that the law allows. The trust’s term will reduces if the trustee distributes the assets to the beneficiaries at an earlier date. Subsequently, the trustee will terminate or wind up the trust.

What Are Discretionary Trusts?

A discretionary trust is a trust where the trustee has discretion to which beneficiaries (if any) will benefit from the trust’s income or capital from year to year. The trustee has the discretion to determine which beneficiaries receive distributions and to what extent. Discretionary trusts are flexible in that the trustee can canvass the tax attributes of the various beneficiaries from year to year. Therefore, they can then determine where to distribute the trust income in the most tax effective manner.

Family trusts are usually discretionary trusts with a broad range of potential beneficiaries. A discretionary trust can help protect family assets and enable income and capital to be spread among family members. 

How Do You Set Up a Discretionary Trust?

In general, a discretionary trust is set up by a contribution being made to the trust  by a party that is unrelated to the beneficiaries. This small gift may be just $10 and the party who makes it is referred to as the settlor.

Once the settlor has made the contribution, most of the trust property will come from loans or gifts made by the party who sought to establish the trust. This party is also generally a beneficiary of the trust.

What Are Unit Trusts?

On the other hand, unit trusts are a type of fixed trust where the trustee holds the assets of the trust for the benefit of unitholders. This benefit will be in proportion to the number of units that each unitholder acquires. There may be multiple classes of units on offer with different rights for each class. Third parties often use unit trusts are often as an vehicle for investment. 

A unit trust differs from other trust structures in that the trustee divides the trust’s property into fixed and quantifiable parts, called units. Beneficiaries subscribe to these units in a similar way that shareholders subscribe to shares in a company. Unit trusts give the unitholders certainty. The money or property from the unit trust is distributed to the beneficiaries in fixed proportions to the units that they hold.  

For example, if you have two unitholders who each own 50% of the units, they each receive 50% of the distribution.

Unitholders are the main people or entities that benefit from the trust and can be individuals or companies. They are quite often corporate trustees of various family discretionary trusts.  

Unitholders should carefully consider the tax, stamp duty and estate planning implications of the trust structure and the trustee’s decisions. It is important for the unitholder or trustee to seek accounting and tax advice on these matters.

Unit trusts are more appropriate if third parties are investing together.

For example, each third party could acquire units in a trust that carry on a business or acquire investment assets.

Further, unit trusts facilitate the entry and exit of investors without having to sell off fractions of the underlying assets. 

Key Takeaways

There are key differences between discretionary trusts and unit trusts that are important to consider before making any business decisions. These differences concern the;

  • trust establishment process;
  • daily running of the trust; and
  • tax considerations.

You should seek specific advice about the implications of holding particular assets in a trust. If you have any questions about the most appropriate trust structure for your circumstances, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page. 

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