Discretionary Trusts vs Unit Trusts (2026 Update)

Unit trust vs discretionary trust comes down to one question: who decides how the money gets split? In a unit trust, each person’s share of income and capital is fixed by the number of units they hold. In a discretionary trust, the trustee decides each year which beneficiaries get paid and how much.

Most people end up in a trust because their accountant suggested one. Then they sign a long deed they never read. That’s fine until a business partner wants out, a child turns 18, or the tax rules shift. And in 2026 they shifted. The Federal Budget proposed a 30% minimum tax on discretionary trusts from 1 July 2028, which changes the maths on this decision for the first time in decades.

What is the difference between a unit trust and a discretionary trust?

Both are express trusts. A trustee holds assets (cash, property, shares, a business) for other people, under rules set out in a trust deed. The difference is how the benefit gets carved up, and that one difference flows through to tax, control, asset protection and what happens when someone wants out.

Here’s the mistake we see most: choosing purely on tax. Tax rules change (2028 is proof). The people in the structure, and how much they trust each other, don’t change nearly as fast. Start there.

How does a discretionary trust work?

Say your father, Richard, is the trustee of your family trust. The beneficiaries are a class of people named in the deed: you, your partner, your three kids and a family company. Each year, before 30 June, Richard decides who gets that year’s net income.

One year he might split it equally. The next, your partner is on parental leave with almost no income, so most of it goes to them. Nobody has a right to any of it until Richard resolves to distribute. That flexibility is the whole point, and it’s why roughly four in five Australian trusts are discretionary.

You’ll hear “family trust” and “discretionary trust” used as if they’re the same thing. Close, but not quite. A family trust is a discretionary trust that has made a family trust election with the ATO. That election unlocks some concessions for losses and franking credits. The trade-off: distributions outside the family group get hit with family trust distribution tax at the top rate.

The catches nobody mentions at set-up

Kids under 18 are a trap. Distribute to a minor and anything above $416 a year is taxed at penalty rates that climb to the top marginal rate. Those three kids only become useful beneficiaries for tax purposes once they turn 18.

Paper distributions get attacked. If the trust “pays” your 19-year-old but the money actually funds your mortgage, the ATO can ignore the distribution under section 100A and tax the trustee at the top rate. The ATO’s finalised section 100A guidance is clear that an adult child who actually receives and enjoys their distribution is fine. The problem is the round trip.

Miss the 30 June deadline and you pay more. No valid resolution by year end? The trustee can be taxed on the undistributed income at the top marginal rate. Put a reminder in your calendar for early June. Seriously.

If this is the structure for you, a discretionary trust deed sets out the beneficiary class, the trustee’s powers and who holds the appointor role.

How does a unit trust work?

Now picture three people who aren’t related: Priya, Tom and Sam. They pool money to buy a warehouse, and a trustee company holds it for them. Priya puts in half the money and takes 50 units. Tom takes 30. Sam takes 20.

Rent comes in, and the split is automatic: 50%, 30%, 20%. Nobody decides anything. That certainty is exactly what unrelated co-owners want, because nobody’s share depends on the goodwill of the others.

Five years later Tom wants out. Because units are property, he can sell them, subject to whatever the deed says about pre-emptive rights and valuation. Try doing that as a discretionary beneficiary. There’s nothing to sell.

Where unit trusts go wrong

The deed doesn’t cover the fight. A unit trust deed deals with the trust. It rarely deals with deadlocks, a partner who stops contributing, or who gets first dibs on Tom’s units. Those belong in a unitholders agreement, and skipping it is the most expensive shortcut in this whole area.

“Unit trust” doesn’t automatically mean “fixed trust” for tax. If the deed lets the trustee issue or redeem units at non-market prices, or change entitlements, the ATO may not treat it as fixed. That affects how losses and franking credits work. From 2028 it could also affect whether the minimum tax applies. Get the deed checked.

Asset protection is thinner. If Tom goes bankrupt, his units are an asset his trustee in bankruptcy can take and sell. A discretionary beneficiary’s hope of a future distribution is much harder to reach.

Our guide to the advantages and disadvantages of a unit trust goes deeper. When you’re ready, a unit trust deed is where the unit classes and transfer rules get locked in.

Who’s involved in a unit trust vs discretionary trust?

Same cast, different power balance. This is where most people’s questions actually start.

Trustee

The trustee legally owns the assets and runs the trust. It must act in good faith and in the beneficiaries’ best interests, and it’s personally liable for the trust’s debts. That last point is why most trusts use a company as trustee. Read more about how a corporate trustee works.

Beneficiaries and unitholders

In a discretionary trust they’re beneficiaries with a right to be considered, and nothing more. In a unit trust they’re unitholders with a fixed, saleable interest. Unitholders usually also get votes on big decisions, such as selling the main asset or replacing the trustee.

Appointor

The appointor can remove and replace the trustee, which makes it the real seat of control in a discretionary trust. Most unit trusts don’t have one. Control sits with the unitholders instead, who vote the trustee in or out under the deed. Some unit trust deeds do include an appointor, so check yours.

Settlor

The settlor creates a discretionary trust by gifting a nominal sum, often $10, and then steps away. They shouldn’t be a beneficiary, which is why the settlor is usually an unrelated person or the law firm. Unit trusts are a mixed bag. Many are established by the first unitholders subscribing for units, with no settlor at all. Others use one anyway.

Trust deed

The rulebook. It sets the beneficiaries or unit classes, the trustee’s powers, how the deed can be changed and when the trust ends. Most states cap a trust’s life at 80 years, so the deed sets a vesting date.

How does the proposed 30% minimum tax change the unit trust vs discretionary trust decision?

This is the biggest shift in trust tax in a generation. The ATO’s summary of the proposed minimum tax on discretionary trusts says it was announced on 12 May 2026 and would start on 1 July 2028. It isn’t law yet. Here’s how it’s designed to work:

• The trustee of a discretionary trust pays tax of at least 30% on the trust’s taxable income.
• Individual beneficiaries get a non-refundable credit for tax the trustee has paid on their share. So a beneficiary on a higher rate tops up the difference, and one on a lower rate gets no refund.
• Corporate beneficiaries get no credit. That means the classic “bucket company” setup faces two layers of tax.
• Fixed trusts, widely held trusts, super funds and several other types are excluded.
• Treasury has flagged three years of rollover relief from 1 July 2027 so people can move assets out of discretionary trusts into companies or fixed trusts.

Treasury’s exposure draft, released on 3 September 2026, added something new. A discretionary trust that exists on 1 July 2028 can elect to lock in fixed percentage entitlements for nominated beneficiaries and sit outside the regime. The catch: nominated beneficiaries generally can’t change, and revoking the election is a one-way door.

What does this mean for you? A few blunt takeaways:

• Don’t panic-restructure. The rules are still in draft, and moving assets triggers duty that the rollover may not cover.
• Setting up a new trust now? Model both structures over a five-year horizon, not just this financial year.
• Income splitting with low-income adults is where the benefit shrinks most. Asset protection and succession planning still work exactly as they did.
• A unit trust isn’t automatically safe. It needs to meet the “fixed trust” test, and the draft rules tighten what counts.

Should you choose a unit trust or a discretionary trust?

Most people over-think this. For most small businesses the answer falls out of two questions: are the people involved family, and will anyone ever need to exit?

Choose a unit trust if

• You’re going in with unrelated partners or investors, and everyone needs a fixed, provable share.
• People will come and go. Units can be issued, bought back or sold without rewriting the whole structure.
• You’re buying property or a business together and want a clean way to value each person’s stake.

Choose a discretionary trust if

• It’s one family, and the adults’ incomes rise and fall across different years.
• Asset protection matters, for example because one of you works in a profession that gets sued.
• You want to pass wealth down the generations without transferring fixed interests every time someone’s circumstances change.

Consider neither if

You’re a solo consultant with no family members earning much less than you, and no assets worth protecting yet. A trust brings an extra tax return, trustee resolutions and deed maintenance. A company taxed at the 25% base rate is often simpler. That’s a conversation for your accountant before you sign anything.

What is a hybrid trust or a “discretionary unit trust”?

A hybrid trust mixes both models. There are fixed units for some of the benefit and trustee discretion for the rest, or units whose rights the trustee can switch on and off. On paper it’s the best of both worlds.

In practice, hybrids draw ATO attention. They rarely pass the “fixed trust” test, so trust loss rules bite, and they’re likely to land inside the 2028 minimum tax. Some banks and state revenue offices also treat them less favourably. Unless an adviser can explain exactly why you need one, choose a side.

What we see in Lawpath consultations

Lawpath lawyers and accountants talk trust structures with business owners every week. These patterns come up again and again.

Families buying commercial property often need a unit trust, not a family trust. When parents and an adult child pool money for a property and want each person’s stake locked in for succession, our lawyers regularly steer them to a unit trust with a corporate trustee. The trap is changing the split later. Moving units between family members down the track can trigger CGT and duty, so settle the proportions before settlement day.

Moving an asset into a trust later costs real money. A consistent pattern: someone buys an investment property in their own name, then realises they want asset protection. Transferring it into a trust usually means paying transfer duty again, plus possible CGT. The cheap move is buying the next asset inside the trust from day one.

Property syndicates can accidentally become regulated schemes. Once a unit trust pools money from several passive investors, it can stray into managed investment scheme territory under the Corporations Act 2001 (Cth), with licensing and disclosure consequences. Where investors aren’t hands-on, our lawyers push for genuine unitholder control: committees, real votes on major decisions and a firm cap on investor numbers.

Small deed changes carry big tax risk. Changing a trust’s name or terms sounds like admin. Done badly, the ATO could treat it as creating a new trust, which triggers CGT on everything inside. Check the deed’s variation clause, get every required consent, and include wording confirming no new trust is created. Use a proper variation of discretionary trust deed, not a letter.

People ask for a family trust when they really need a company. Solo consultants often book a call wanting to split income through a family trust, when no one in the family earns meaningfully less than they do. More often than expected, the answer is a company.

How do you set up a unit trust or discretionary trust?

Setting one up takes days, not months, once you’ve decided. Here’s the sequence:

1. Decide the structure with your accountant. Bring the 2028 question into that conversation.
2. Register the trustee company. If you’re using a corporate trustee, register the company first, because it has to exist before it can sign the deed.
3. Prepare and sign the deed. Name the right beneficiary class or unit classes. Get this wrong and fixing it later is costly.
4. Settle the trust or issue the first units. For a discretionary trust, the independent settlor hands over the nominal sum. For a unit trust, the first unitholders subscribe.
5. Stamp the deed if your state requires it. Duty rules and deadlines differ between states.
6. Register and bank. Apply for a TFN and ABN for the trust, open a trust bank account and register for GST if you’ll hit the threshold.
7. Paper the relationships. Unit trusts need a unit register and, ideally, a unitholders agreement. Discretionary trusts need a calendar reminder for resolutions before 30 June every year.

Frequently asked questions

Is a unit trust a discretionary trust?

No. A unit trust gives each unitholder a fixed share based on units held. A discretionary trust lets the trustee choose who benefits each year. A hybrid trust blends the two, but a standard unit trust is not discretionary.

Does a unit trust have a settlor?

Sometimes. Many unit trusts are established by the first unitholders subscribing for units, so no settlor is needed. Others use a settlor who gifts a nominal amount, just like a discretionary trust. Your deed will say which approach it takes.

Does a unit trust have an appointor?

Most don’t. In a unit trust, control usually sits with the unitholders, who can vote to replace the trustee under the deed. Some deeds still include an appointor, which shifts control away from the unitholders. Check yours before you sign.

What is a fixed unit trust?

It’s a unit trust where unitholders’ rights to income and capital are fixed and can’t be changed by the trustee. Only these qualify as “fixed trusts” for tax. That status matters for trust losses and franking credits, and it’s likely to decide who escapes the proposed 2028 minimum tax.

Is a family trust the same as a discretionary trust?

Almost. A family trust is a discretionary trust that has made a family trust election with the ATO. That election gives access to certain concessions but penalises distributions outside the family group at the top tax rate.

Which is better for property investment: a unit trust or a discretionary trust?

It depends on who’s investing. Unrelated co-investors should use a unit trust so everyone’s share is fixed and saleable. A single family usually gets more from a discretionary trust’s flexibility and asset protection, though the 2028 minimum tax makes the gap smaller.

Does the 30% minimum tax apply to unit trusts?

The proposal excludes fixed trusts, so a genuine fixed unit trust should sit outside it. A unit trust whose deed gives the trustee discretion over entitlements may not count as fixed. The measure isn’t law yet and is proposed to start on 1 July 2028.

Can you convert a discretionary trust into a unit trust?

Not by simply amending the deed. That usually risks creating a new trust for tax purposes. The normal path is transferring assets to a new unit trust, which can trigger CGT and duty. Treasury’s proposed rollover relief from 1 July 2027 may reduce that cost.

Can a discretionary trust own units in a unit trust?

Yes, and it’s a common setup. Business partners each hold their units through their own family trust. The unit trust gives the partners fixed shares, while each family keeps flexibility over its own slice.

What is the difference between a cash trust and a unit trust?

A cash trust (or cash management trust) is a managed fund product that invests in cash and short-term deposits, which you buy units in. It’s an investment product, not a structure you set up for your family or business. A private unit trust is a structure you own and control.

What should you do next?

If you’ve read this far and still feel unsure, you’re in good company. Most people setting up their first trust feel exactly the same. You don’t need to master trust law. You need to know who’s involved, whether anyone will ever need an exit, and how 2028 changes your numbers. Then get the deed right the first time.

Set up your trust with a Lawpath lawyer. They’ll draft the deed, act as settlor, and handle the signing and stamping, so your structure is done properly in one go.