Unit trusts are a fixed express trust. ‘Fixed express’ refers to the fact that the trust 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 a unitholder owns determines the benefit they receive. This makes the unit trust a popular investment 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.
Unit trusts will require a unit trust deed and an accurate record of the unitholders. Although there is no regulatory body that manages a unit trust’s record-keeping, proper administration of the trust is vital. This article will explain the documents required 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 because it sets out the key roles within a trust, as well as the powers associated with these roles.
The unit trust deed will set out the key positions within the trust, for example, the:
- settlor; and
Identify Rights and Powers
The trust deed will also outline the powers of each position under the trust and administrative matters such as the:
- 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 as it limits their legal responsibility. 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 the possibility 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 the Unitholders
The trust deed should require the trustee to maintain a register of unitholders that records the:
- name and address of each unitholder;
- number of units held;
- class of units;
- details of the unit certificate;
- date the unitholder became a unitholder; and
- date the 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 or profit a unitholder is entitled to, when they became entitled to it and be able to identify their voting rights.
Units can be valued and sold. For a unitholder to sell or transfer units, the trustee needs to transfer the unitholder’s holdings to the new unitholder. The trust deed must allow this to happen when a unitholder requests.
Unitholders have voting rights and can assist with the direction of the trust. Meetings need to be held to enable a vote to occur. A unit trust deed will set out:
- who can call meetings. For example, the trustee or unitholders who own a certain percentage of units; and
- the requirements for minute taking, resolutions and the quorum required for a valid meeting.
2. Unitholders Register
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, for example, quarterly distributions.
Maintaining a record allows you to accurately identify the owners of units and the classes they own. This is useful to have when there are matters requiring a vote or meeting, or if there is a dispute over unit ownership.
3. Application for Units
This document is used by incoming 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
When the trustee grants units, they will issue a unit certificate. The certificate outlines the number and class of units that the unitholder owns. Each unit certificate should have a unique number to assist with record-keeping and management of the register.
5. Transfer of Units Form
The transfer of units form 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 does not go into detail about the relationship between unitholders. This leaves uncertainty as to how to proceed in circumstances such as when:
- a decision cannot be made in a meeting;
- a dispute arises between unitholders;
- someone wants to exit the trust;
- someone sets up a competing business; and
- a unitholder is in a position where there is a conflict of interest.
A unitholders agreement sets out the framework for managing these types of scenarios. Each matter is addressed differently depending on why the unit trust was established and the terms negotiated between the unitholders. A unitholders agreement is not mandatory, however, it is best practice to have one in place. Below are some examples of how to address these types of issues.
Dispute Resolution Framework
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 breaks down. It is, therefore, a good idea to have a dispute resolution framework in place.
The framework will emphasise alternative methods of dispute resolution to provide fast and cost-effective solutions to resolve disagreements. This is usually much more effective than taking the matter directly to court.
Processes for 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. As a result, unitholders agreements often contain clauses that provide existing unitholders with priority in purchasing units of an exiting holder.
It will also generally contain drag along clauses. This requires unitholders to sell their units when the majority of unitholders want to sell their units to a party outside the trust.
Clauses Protecting the Trust’s Investment
Unrelated parties commonly use a unit trust to invest in a particular development or project. It may sometimes be tempting for someone to put their own interests ahead of the investment. As a result, a unitholders agreement should address this risk in the agreement through non-compete, conflict of interest and confidentiality clauses.
Non-compete clauses are common in business agreements as they prevent the business parties from competing against the business. They protect the interests and investment of the parties and provide a mechanism for seeking compensation in the event of a breach.
Similarly, a unitholders agreement should include a non-compete clause preventing a unitholder from reducing the trust’s value.
Conflict of Interest Clauses
Unitholders agreements often contain clauses requiring unitholders to declare any conflicts of interest. For example, if a property developer has a conflict of interest with the planned development, they will often be required to declare this interest. This is to increase transparency between the unitholders and reduce the 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 also provides other unitholders with a mechanism to seek 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. A trust is a relationship between the trustee and beneficiaries rather than between natural persons or corporations. Therefore, you should draft clauses in a manner that binds the people who are actually receiving benefit from the unit trust.
7. Unitholders and Shareholders Agreement
If your trustee is a company, you may draft a shareholders document in addition to the unitholders agreement. It includes provisions relating to the rights and obligations of shareholders in the trust. For example, it could include clauses:
- requiring shareholders to appoint a director of the corporate trust; and
- setting out how to transfer shares when a unitholder changes or exits the trust.
There are some 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. They also ensure smooth distribution and transfer of units and helps maintain accurate records of the unitholders. Although additional documents such as a unitholders agreement (or a 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 LegalVision’s business lawyers on 1300 544 755.
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