Unit trusts are a fixed express trust that provides a defined and quantifiable benefit to the beneficiaries. Unlike a discretionary trust where the beneficiaries have no right or claim to receive distributed income, the number of units determines the benefit a unitholder receives. A unit trust is then similar in some respects to a company limited by shares because unitholders have voting rights, fixed claims to income and the ability to sell their units.
These qualities make the unit trust a popular vehicle for investment by a number of unrelated parties in a particular project as there is no central person in charge of distributions (such as the trustee of a discretionary trust). Unitholders can also sell their units relatively easily if they find a buyer.
Unit trusts will require a unit trust deed and an accurate record of the unitholders. Although a regulatory body doesn’t govern the requirement to maintain accurate records in the same way members of a company must update ASIC’s register, it is vital to the proper administration of the trust. Below, we explain what other documents are needed to set up a unit trust, their purpose and their contents.
1. Unit Trust Deed
The unit trust deed is essential to establishing a unit trust as it sets out the key roles within a trust and the powers associated with these roles.
The unit trust deed will set out the key positions within the trust. For example, the trustee, settlor and unitholders. The trustee of a trust can be an individual or a corporate trustee. The type of trustee you proceed with can affect the other documents you require to run the trust (see below).
Identify Rights and Powers
The trust deed will also outline the powers of each position under the trust and administrative matters such as:
- Requirements of the trustee;
- Remuneration of the trustee;
- Vesting date; and
- Rights associated with each unit.
The trust deed will generally include an indemnity clause to protect the trustee in the event of legal action. This clause serves to incentivise potential trustees otherwise, it would be difficult to find someone willing to assume a relatively large amount of personal liability for comparatively little remuneration.
How is a Unit Trust Deed Different?
A discretionary trust beneficiary has a mere expectancy of receiving a benefit whereas a unitholder has an actual right to receive a defined amount. Consequently, a unit trust deed must also include a number of additional provisions to ensure the trustee has the power to manage the administration of the trust adequately.
Identify Who’s Who in the Zoo
The trust deed should require the trustee to maintain a register of unitholders that records the following:
- Name and address of each unitholder;
- Number of units held;
- Class of units;
- Details of the unit certificate;
- Date a unitholder became a unitholder; and
- Date a unitholder ceased to be a unitholder.
These details are essential to properly running the trust for both accounting and legal purposes. It is important to know the share of income/profit a unitholder is entitled to, when they became entitled to it and identify their voting rights.
As units confer a property right to a unitholder, they can be valued and sold. The trust deed must provide the trustee with the power to transfer holdings from a unitholder to another person upon the unitholder’s request.
Meetings of Unitholders
As unitholders have voting rights and can assist with the direction of the trust, there will be meetings that need to be held to enable a vote to occur. A unit trust deed will set out:
- Who can call meetings (e.g. the trustee or unitholders who own a certain percentage of units); and
- The requirements surrounding minute taking, resolutions and the quorum required for a valid meeting.
2. Register of Unitholders
As discussed above, the trustee must be able to keep track of unitholders, their holdings and the period when the units were held. For accounting purposes, this is important to ensure distributions are calculated accurately based on unit holdings at particular times (e.g. quarterly distributions).
For legal reasons, maintaining a record allows you to accurately identify the owners of units and the classes they own if there are matters requiring a vote/meeting/quorum of unitholders or a dispute over ownership.
3. Application for Units
This document is used by oncoming unitholders who formally request that the trustee transfers units to them. It sets out the number of units purchased, the purchase price and acceptance of the terms of the unit trust deed.
4. Unit Certificate
If the trustee grants an application for units, they will issue a unit certificate. The certificate outlines the number and class of units that the unitholder is recorded as holding. Each unit certificate should have a unique number to assist with record keeping and management of the Register.
5. Transfer of Units Form
This document, as the name suggests, formalises the transfer of units from a unitholder to another party. It sets out the number of units being transferred, the price paid per unit and acceptance of the terms of the unit trust deed.
6. Unitholders Agreement
While the unit trust deed covers the necessities of setting up and operating the trust, it doesn’t go into detail about the relationship between unitholders. This leaves uncertainty as to how to proceed in certain circumstances that can often occur when running a business or throughout the life of an investment. For example:
- What if a decision can’t be made in a meeting?
- What if there’s a dispute between unitholders?
- What if someone wants to exit the trust?
- What if someone sets up a competing business?
- What if a unitholder is put in a position where there’s a conflict of interest?
A unitholders agreement will set out the framework for managing these types of scenarios. How each matter is addressed will depend on why the unit trust was established and the terms negotiated between the unitholders. We have set out below some examples of how to address the issues.
A framework for resolving disputes.
A disagreement could arise over a minor administrative matter that results in a deadlock at a unitholders meeting or it could be a more severe issue that affects the operation of a trust. Quickly resolving a dispute will allow the unit trust to continue operating and reduce the risk that the relationship between the parties irrevocably breaks down.
The framework will emphasise alternative methods of dispute resolution to provide fast and cost-effective solutions to resolve disagreements compared with taking the matter directly to court.
Exiting the trust
Given each unit can hold voting rights, the sale or transfer of a unit holding can affect other members of the trust. For this reason, unitholders agreements will often contain clauses that provide existing unitholders the first right to purchase units of an exiting holder.
It will also generally contain drag along/tag along clauses that will require minority unitholders to ‘tag along’ in the event that a majority of unitholders want to sell their units to another party outside the trust.
Protecting the trust’s investment
As unrelated parties commonly use a unit trust to invest in a particular development, project or other investment, there may be the temptation for one person to put their own interests ahead of the investment. This could take form in a number of ways, and a unitholders agreement should address this potential risk to the trust.
Non-compete clauses are common in business agreements as they protect the interests and investment of the parties and provide a mechanism for seeking compensation in the event of a breach. A unitholders agreement should include a clause of this type to prevent a unitholder in a trust from, for example, commencing a competing property development that may reduce the value of the unit trusts development/investment.
Conflict of Interest
Continuing with the same example, if a property developer has a conflict of interest with the planned development they will often be required to declare this interest in order to increase transparency between the unitholders and reduce risk of loss or dispute later.
This clause requires unitholders to protect the trust’s commercial interests by not disclosing any details of the trust’s activity to outsiders. A confidentiality clause provides other unitholders with a mechanism to seek damages or compensation in the event of a breach.
Notably, for asset protection and tax planning purposes, another trust structure (such as a discretionary trust) usually holds the units in a unit trust. As a trust is a relationship between the trustee and beneficiaries, rather than a natural person or an incorporated entity such as a company, ensure that the clauses are drafted in a manner that binds the people actually receiving benefit from the unit trust.
7. Unitholders and Shareholders Agreement
A shareholders document is an expansion of the unitholders agreement and includes provisions relating to the rights and obligations of shareholders in the corporate trustee. Examples of the additional clauses include the shareholding required to appoint a director of the corporate trustee and how to transfer of shares if a unitholder changes or exits the investment altogether.
There are a number of essential documents required when setting up a unit trust. Namely, the unit trust deed and the associated forms and certificates are essential to the trust’s formation, distributing and transferring units and maintaining accurate records of the unitholders.
Although additional documents such as a unitholders agreement (or unitholders and shareholders agreement in cases where the trustee is a company) are not required, they are best practice. This agreement serves as a record of all agreed terms, reducing the possibility of disputes arising and providing clarity for oncoming unitholders.
If you have any questions about unit trusts or need assistance drafting the corresponding documents, get in touch with our specialist business structuring lawyers on 1300 544 755.