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Discretionary and Unit Trusts

  • A trust is a legal relationship where a person, known as the trustee, is under an obligation to hold property for the benefit of other persons, known as beneficiaries.
  • The key difference between a discretionary trust and a unit trust is that the trustee chooses that beneficiaries will receive distributions and how much they will receive.
  • For trusts to be tax efficient, they must distribute income to beneficiaries. Otherwise, they will pay tax at 46.5%

Discretionary Trusts and Family Trusts

A discretionary trust, also known as a family trust, is a legal document that conveys legal title to trust property to a trustee. The document also sets out the purpose for which a trust has been formed, as well as the rights and the obligations of the trustee.

A trust deed is the main legal document that conveys title and imparts the rules within which the trust must operate. It also dictates its investment guidelines and describes how income will be distributed amongst the beneficiaries.

Family Trusts

A discretionary trust is occasionally referred to as a family trust. However, for taxation purposes, a family trust means a trust that has made a family trust election.

Types of Beneficiaries

There are many types of beneficiaries. The two main types are:

  • Primary beneficiaries: Entitled to undistributed capital and income on winding up the trust
  • General beneficiaries: Usually includes the primary beneficiaries as well as other people set out in the trust deed.

Key Considerations

  • In opening a trust, a new bank account has to be opened, there needs to be minutes/resolutions for annual income distribution, and trustees should decide in what to invest.
  • There are different types of beneficiaries, such as primary beneficiaries, income beneficiaries and capital beneficiaries.
  • If a trustee’s liability arose from the proper exercise of its powers and duties, the trustee could be indemnified out of the trust assets.

Unit Trusts

A unit trust is a trust in which the trust property is divided into some defined shares called units. A unit trust is established by subscription. The assets of a unit trust are held by the trustee on trust for the unitholders, who are entitled to the capital in proportion to how many units they hold.

The elements of a unit trust are:

  • The trustees;
  • The trust fund, such as the trust property; and
  • The unitholders

Benefits of a Unit Trust

The main advantage of a unit trust over a discretionary trust is that the parties involved are issued with units which, like shares:

  • Define the party’s interest in the assets and income of the trust
  • Can be reacquired by the trustee
  • Can be easily transferred

Non-Geared Unit Trust

There are certain limitations set in non-geared unit trusts. Otherwise, they are identical to an ordinary unit trust. They may also be considered by trustees of SMSFs (self-managed superannuation funds) wanting to invest in a related unit trust. The trustee can issue units of different classes or reclassify existing units into different classes.

Fixed Unit Trust

A fixed trust, compared to a non-fixed trust, has different rules to claim tax losses. A trust is fixed if persons have fixed entitlements to all of the income and capital of the trust.

Frequently Asked Questions about Trusts

Q: What are the common pitfalls for establishing trusts?
A: Common pitfalls include not dating or stamping the trust deed, the trust bank account being opened some months after the date shown on the trust deed, or the terms of the trust deed not being followed.

Q: When does a unit trust start?
A: A unit trust by subscription commences when the unitholders subscribe for units in the trust.

Q: Should different trusts have different trustees?
A: Generally, yes. It avoids the need to prove which assets belong to which trust.

Q: What is a beneficiary?
A: A trust beneficiary is a person (or group of people, including entities) for whose benefit the trustee holds the trust property.

Q: What is a pedigree trust?
A: In a pedigree trust, the property of the trust will remain within a particular family, perhaps by the direct relationship to a particular individual.

How can LegalVision help me?

LegalVision assists businesses and individuals with tailored online legal advice for a fixed-fee, including establishing trusts or resolving disputes arising from trust funds. Call LegalVision today on 1300 544 755.

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