Advantages and Disadvantages of a Unit Trust
Ever thought of setting up a trust? Read below to find out it's advantages and disadvantages before you set up one.
Trusts are complex. There are various legal requirements, tax implications, and decisions to choose the most suitable type of trust involved in the creation of a trust. At its heart, however, a trust is simply a relationship where a person (the trustee) is under an obligation to hold property for the benefit of others (the beneficiaries).
Unit Trusts are a type of trust that explicitly divide the trust fund into units for the beneficiaries. Each beneficiary in a Unit Trust subscribes to a unit, similar to how investors subscribe to shares in a company. Unlike a discretionary trust, Unit Trust holders have a proprietary interest in the trust property. They can therefore sell and purchase their rights to each unit to anyone, much like shares in a company.
The beneficiaries are also entitled to the Unit Trust fund’s income and capital, proportional to the number of units that they hold. The Trustee owns the trust legally and is therefore responsible for its management. They also have the right to sign documents and make decisions on the beneficiaries’ behalf. To counteract this enormous power, they also have the enormous responsibility to exercise reasonable skill and care in their decision-making. Unit Trusts thus bring with them various advantages and disadvantages.
Unlike a company, a Unit Trust does not have to pay any tax. The beneficiary has to pay income tax on the proportional profits they derive from the trust. Similarly, trusts enjoy a 50% Capital Gains Tax discount regarding disposal of assets, that can be passed on to the beneficiaries if the trust is structured accordingly.
Unit trust holders also enjoy asset protection from internal, as well as external parties. As none of the beneficiaries hold legal rights in the trust property, they cannot claim the trust’s assets. Consequently, if any of the beneficiaries cannot pay off their debts, the creditors cannot seize the trust property as compensation. Similarly, if one of the beneficiaries’ is involved in court proceedings such as divorce, the court cannot direct the trust’s assets towards satisfying the spouse’s claims.
A trust, unlike a company, isn’t as heavily regulated. While a Company needs to comply with regulations monitored by legislation, ASX and ASIC, trusts do not have such limitations. They are also easier to wind up than companies.
Potential loss of control
As none of the Unit Trust holders have legal rights over the trust, they are at the mercy of the trustee. A trustee being the only decision-maker and legal rights holder, might make decisions that the beneficiaries don’t always agree with. Or the trustee’s decisions might lead to a loss, that cannot always be distributed amongst the beneficiaries. Consequently, they might feel a loss of control over their own assets.
There are remedies available for a breach of trustee’s duties, but the process is frustrating and time consuming, as well as expensive.
Setting up a Unit Trust could have massive monetary ramifications. They are traditionally more expensive to set up than a sole trader, or even a company. Additionally, the beneficiaries might be subject to PAYG calculations. If their income is higher than a certain amount, they would end up paying a higher tax amount than the company tax.
Setting a Unit Trust Fund is a complex and costly process. Make sure you consult with an estate planning lawyer on LawPath’s lawyer marketplace if you want further advice on trusts.
Want to know which trust is right for you? Contact a LawPath consultant on 1800 529 728 to learn more about customising legal documents, obtaining a fixed-fee quote from our lawyer marketplace or any other legal needs.
Avi is a legal intern at Lawpath. He is currently studying a Bachelor of Commerce (Finance) with a Bachelor of Laws at Macquarie University.