Part one: How to form a Unit Trust

Once you understand the ins and outs of a unit trust, you will be able to take full advantage of the benefits a unit trust confers. It is important that you understand each party’s role in operating the trust and how the unit trust can be utilised to maximise asset protection, while minimising tax.

What is a Trust?

A trust involves one party (the Trustee) having to hold assets or money or some other property on behalf of, or for the benefit of, one or more persons (the Beneficiaries). This agreement between the parties is based on the terms of the Trust Deed that the Settlor and Trustee entered into together.

Although trusts are not separate legal entities, the Australian Tax Office will still require that a trust tax return be lodged each financial year. In terms of legal ownership, the Trustee owns the property that is the subject of the trust, whereas the Beneficiaries hold the beneficial interest to that property.

What is a Unit Trust?

Unit trusts differ from regular trusts in that the property held in trust is divided into defined and quantifiable parts, which are called units. Beneficiaries subscribe these units like shareholders subscribe to shares in a company.

As such, a Beneficiary to a unit trust, having a proprietary interest in the unit trust property, is entitled to proportionate capital/income from the trust depending on how many units the Beneficiary holds.

Parties to a Unit Trust

In determining how a unit trust works, the role of each of the five elements of a unit trust should be known. The role of the five elements may be summarised as follows:

The Trustee – The Trustee is not the beneficial owner of the trust property, but the legal owner. The Trustee is in charge of signing off any important documents and will partake in all transactions of the trust in its own name and on behalf of the trust. The duty that the Trustee must always maintain is the best interest of the Beneficiaries, as well as the terms of the Trust Deed.

The Settlor – This person creates the trust by settling some property on trust for the Beneficiaries to the trust.

The Trust Fund – This includes everything held on trust, such as funds, income, or other property that the Trustee holds in accordance with the Trust Deed.

The Beneficiaries – These are the parties for which the trust property is held. The Beneficiaries can be people, i.e. individuals, and also entities such as companies. The entitlement for each Beneficiary to a unit trust is obviously limited to the share (portion of units) each beneficiary possesses.

The Trust Deed – This document frames the contractual relationship between the Beneficiaries of the trust and the Trustee. The Settlor and the Trustee make up the parties of the Trust Deed. It details how the trust property may be invested and what duties the Trustee must uphold in managing the trust.

Conclusion

If you found this article helpful and informative, we recommend you read Part two: How to form a Unit Trust.

If you need legal assistance in setting up a trust, contact LegalVision on 1300 544 755. One of our commercial lawyers will be able to assist you and provide a fixed-fee quote for advice.