A unit trust is a business structure in which beneficiaries—called unitholders—have fixed entitlements to the trust’s income and capital. Unlike a discretionary trust, where the trustee can decide how income and capital are distributed, a unit trust grants unitholders set rights that do not depend on the trustee’s discretion.
Key People and Documents
Trustee
- Usually a shelf company created to serve as the trustee of the unit trust.
- Holds legal title to the trust’s assets and can be held personally liable for debts incurred during its trusteeship.
- The trustee’s powers are detailed in the trust deed and remain unaffected by a natural person’s death or incapacity, thanks to the company’s perpetual existence.
Beneficiaries (Unitholders)
- The unitholders have fixed rights to the trust’s capital and income.
- Each unitholder’s entitlement depends on how many units they hold and the terms of issue.
Trust Deed
- The foundational document governing the purpose of the unit trust, the trustee’s powers, and the unitholders’ rights and obligations.
- Explains how units are issued, sold, or redeemed, and sets out any procedures for winding up the trust.
Understanding Units
A unit is a piece of property representing a proportional interest in the trust’s income and capital. Because a unit is a recognised form of property, it can be bought or sold.
- Valuation: The market value of a unit often reflects the unitholder’s right to future distributions of income or capital.
- Transferability: Units can be transferred to new investors, subject to any restrictions imposed by the trust deed or a unitholders’ agreement.
Difference Between a Unit and a Share
- Shares: Give the shareholder an interest in a company but no direct legal or equitable interest in the company’s assets.
- Units: Give the unitholder a proprietary interest in the trust’s property, with an equitable entitlement to the trust’s capital and income.
Unit Holders’ Agreements
When a unit trust is used by unrelated parties to co-own assets, a unitholders’ agreement can help avoid disputes. Similar to a partnership agreement, it clarifies each unitholder’s rights, responsibilities, and processes for transferring or redeeming (selling) units.
Tax Advantages and Other Benefits
- Tax Treatment: A unit trust is not usually treated as a separate taxable entity like a company. Income or capital is typically distributed to unitholders pre-tax, which can be advantageous for tax planning.
- Asset Protection: Property held in trust is generally not available to satisfy the trustee’s personal creditors, offering a degree of separation between trustee liabilities and trust property.
- Less Regulation: Unit trusts often face fewer regulatory requirements than companies. Their financial affairs can remain private, and formal audits may not be mandatory unless required by law or the trust deed.
Note: While unit trusts can offer tax benefits and operational flexibility, they may not provide the same asset protection or discretionary distribution advantages as other trust structures. Choosing the right setup typically involves reviewing your specific objectives and seeking advice tailored to your circumstances.
