How Do I Transfer Units in a Unit Trust?

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Table of Contents

• 1. Consider the Corporate Trustee
• 2. Review the Governing Documents
• 3. Give Notice in Writing to the Trustee
• 4. Prepare the Relevant Forms
• 5. Take the Necessary Administrative Steps
• 6. Letter of Resignation
• Key Takeaways

If you are a unitholder in a unit trust, you already know how beneficial the trust can be for your finances. Nevertheless, at some point in time, you may consider transferring those units if it is the best business decision for you. However, the process of doing this is quite complex and requires planning. This article explains the step-by-step process on how to transfer units in a unit trust.

1. Consider the Corporate Trustee

Trustees are the legal owner of a trust. In a unit trust, the trustee may be either an individual or a company acting as a trustee. More often than not, the trustee of a unit trust is a corporate trustee. In general, a corporate trustee’s shareholdings in the company should mirror their unit holding in the unit trust. This allows the unitholder to participate in controlling the trust at the same rate as their unit holding.

For example, in a unit trust with 100 units, a unitholder who holds 25 units should also hold 25% of shares in the company.

Consequently, if you are thinking of transferring your units, it is common that you should transfer your shares as well. This means that:

• the new unitholder can participate in the decisions that the company makes  about the unit trust; and
• you will no longer have any control or interest in the corporate trustee.

While these steps are not legally required, they are common and best practice. Furthermore, while you will generally sell the units at market value, you can sell your shares cheaply or even free of charge. This is because the shares themselves do not hold any value.

2. Review the Governing Documents

The transfer of units is generally governed by three key documents, the:

1. unit trust deed;
2. company constitution; and
3. unitholders shareholders agreement.

The unit trust deed is the most crucial document. This sets out the process for transferring units in a unit trust. You must comply with the unit trust deed for your transfer to be considered valid. Overall, the process will vary depending on each individual unit trust deed. However, there are a variety of general steps that are commonly followed.

The company constitution governs the transfer of shares at the corporate trustee level. If you do not have a constitution, then the replaceable rules can be used instead.

Overall, a unitholders shareholders agreement sets out key terms that include:

• decision-making process of the board;
• directors’ duties;
• covenants (promises) between unitholders;
• transfer process;
• buy-back process;
• dividends;
• drag along and tag along provisions (where the majority shareholder(s) can require the minority shareholder(s) to sell so that a bidder can purchase the whole company);
• dispute resolution mechanisms; and
• confidentiality.

The unitholders shareholders agreement combines a:

• unitholders agreement, which is the agreement between all unitholders; and
• shareholders agreement, which is the agreement between all shareholders.

There is no requirement for you to have a unitholders shareholders agreement for your unit trust. However, if you do have one of these agreements, it will typically override the unit trust deed where there are inconsistencies.

3. Give Notice in Writing to the Trustee

If you wish to transfer your units, you will typically have to give a transfer notice to the trustee. You may also need to give this notice to the other existing unitholders if specified in the unitholders shareholders agreement or the trust deed. The contents of the transfer notice will be set out in the trust deed but should generally include:

• your intention to transfer the units;
• the number of units you wish to transfer; and
• the price that is fair market value.

Existing unitholders will typically have pre-emptive rights under the governing documents. This means that they have the option to purchase the units in proportion to their current unit holding. If the existing unitholders choose not to exercise this right, then the trustee can transfer the existing units to a third party. 

4. Prepare the Relevant Forms

When transferring your units, you will typically be required to prepare a:

• unit transfer form; and
• share transfer form.

These are simple forms that documents the transferring of your units and shares. They also set out the terms of these transfers.

If you are transferring units to someone who is not an existing unitholder, the incoming unitholder will typically be required to fill out a unit and share sale agreement.

This agreement is much more complex than the transfer form. It sets out your representations and warranties about the:

• unit trust;
• business it operates; and
• assets it holds.

If any of those representations or warranties are not true, the incoming unitholder may be entitled to compensation or insurance. It is not a legal requirement for there to be a unit and share sale agreement, but it is risky to purchase units without one.

5. Take the Necessary Administrative Steps

Once the parties have agreed to the transfer the units and shares, the trustee will have to take a number of steps to update the:

• unit trust;
• company records; and
• Australian Securities and Investments Commission (ASIC) records.

These steps include:

• preparing and providing the incoming unitholder and shareholder with a unit certificate and a share certificate;
• updating the Unit Trust Register and Share Register; and
• updating ASIC’s records in relation to the corporate trustee.

6. Letter of Resignation

If you have transferred all of your units and shares, then you will typically be required to resign. You must provide the trustee with your letter of resignation.

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Key Takeaways

To transfer your units requires understanding the documents that govern the unit trust. There are a number of moving parts, especially when there is a corporate trustee and a unit and share sale agreement.

It is important to understand the process to make sure the units and shares are effectively transferred. If you need any assistance with a unit trust, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.