What is the difference between a Unit Trust and a Discretionary Trust?
A Trust is a legal entity where one individual (the Trustee) holds assets (trust property) for another person/group of people (Beneficiary or Beneficiaries). The terms of the trust are laid out through a Trust Deed, which is the contract entered in to between an initial beneficiary and the trustee. This contract will also govern the relationship between two parties.
The term ‘Unit Trust’ is used to describe a specific type of trust entitling each beneficiary to receive a set ratio of the trust property. Special rules apply to a group of members of 20 or more, in which case the parties should seek specialist advice.
Traditionally a Discretionary or Family Trust is used for the tax effective distribution of assets within a family. This differs from a unit trust in that the distribution to beneficiaries are not in fixed ratios, as they generally would be in a business situation.
The roles in a Unit Trust
There are two distinct roles within a Unit Trust, and these roles must be correctly assigned in order for the trust to comply with legal requirements.
1. The Trustee – the legal owner of the trust property. Usually in a Unit Trust the Trustee will:
- be a Pty Ltd company the directors of which are ordinarily the key people from the unit holders of the trust,
- have day-to-day control over the management of the trust, and
- hold powers as set out by the Trust Deed.
2. The Unit Holders – the people and entities that have an entitlement to the income and capital of the trust. The Unit Holders:
- make the initial contribution to the trust,
- do not hold direct interest in the assets of the trust other than those benefits, provided to them upon the Trustee exercising his/her powers under the Trust Deed,
- can be liable for the debts of the Trust (this can be avoided if the Trust is drafted correctly), and
- have the power to appoint and remove Trustees from the Trust.
How we can help
At Streten Masons Lawyers we have extensive experience in drafting Unit Trust Deeds to be able to properly advise clients of the necessary structures and the tax ramifications involved in setting up this type of structure. It is important that you engage a competent lawyer to draft the Unit Trust Deed to ensure that your rights and obligations are properly catered for. To arrange for a trust deed to be drafted, or for further advice in relation to the Trust Deed, contact us today.
If you wish to order a Unit Trust Deed, please fill out the order form and submit it to our office.