Unit trust vs discretionary trust

Real Estate, Landlord Tenant, Estate Planning, Power of Attorney, Affidavits and More! All Major Categories Covered. What is discretionary trust? Is a family trust the same as a discretionary trust?

Should I establish a discretionary or unit trust?

We’ll start off with the basics. Firstly, we will quickly identify some of the key terms in a trust agreement. See full list on lawpath.

The discretionis in the trustee having the option of splitting up the trust property however they like. Richard can split the whole property into equal thirds, allow Xavier to have a higher share, or even give the whole property to him. Unit trusts are fixe express trusts.

Richard would distribute the property by allocating shares.

Unlike discretionary trusts, unit trusts allocate the shares in the property for beneficiaries in the trust agreement, rather than discretion by the trustee. Each beneficiary is allocated a unitin the trust property beforehand. In your Trust Dee the shares in the investment property are now determined by what was set out in the agreement. The trust agreement can say that Richard has to split the property evenly, or that Janet receives of the shares, while Xavier and Ashley receive each.

The main difference between a unit and discretionary trust is that you make that decision in your agreement, rather than Richard in the future. You can also combine the two for a hybrid trust. Choosing between establishing a discretionary or unit trust can be seem like a difficult choice. Ultimately, it will depend on the level of certainty that you want at the time of agreement.

Before making a trust, you should also consider the stamp-duty, tax, and other implications of your choice. Unsure where to start? A discretionary trust is a trust where the trustee has discretion to which beneficiaries (if any) will benefit from the trust ’s income or capital from year to year. The trustee has the discretion to determine which beneficiaries receive distributions and to what extent. So too, the Unit Trusts ’ Trustee holds the assets for the benefit of the Unit Holders.

Company vs Unit Trust. Unit Trusts have Unit Holders like companies have shareholders. Australian Unit Trusts are similar to companies.

Upon incorporation of your business, your legal identity is separated from the business. This ensures that the personal assets of the owner are protected should the business be unable to pay off its debts. This means that the profits of the business can remain in the company without it needing to be paid out to the owners. Thus, it allows family groups to minimise their tax without paying the highest marginal tax rates of as an individual.

Investors and banks prefer to deal with Pty Ltd companies when it comes to funding and. Capital gains concessions, unfortunately, do not apply towards companies. This concession allows for a discount for assets held for more than months or more at the time of being sold or when relevant capital gains may occur. Additionally, take into consideration the implications of directorshipresponsibilitieswhen setting up your company.

From a tax standpoint, setting up a discretionary trust is one of the most effective business structures. A discretionary trust means that the profits of the business can be distributed to a family member(s) so that the lowest possible individual marginal tax rates apply. This may not be evenly distributed and can be changed each time there is a distribution. Creditors of the business do not have any claims against assets that the trust owns. However, creditors directly towards the trust do have claims against these assets.

Trust business structures are a much more complex and expensive process to establish than a company business structure. Secondly, a discretionary trust mustdistribute its profits to beneficiaries each financial year. Usually, a business that is going through a major growth stage, a company structure can be more appropriate due to lower tax rates on undistributed profits.

Thirdly, discretionary trusts usually involve family members as the parties are comfortable for a trustee to have discretion over distribution amounts each beneficiary receives. If your business is not a family business and operates with independen. Selecting your business structure between a Pty Ltd company vs trust can be tricky. Considerations about the pros and cons need to be fully understood in order to make an accurate assessment of the suitability of each option. Each individual business owner’s situation can differ from one another and therefore.

Only what is most suitable based on the business goals and what stage the business is at. There is no bestoption. At Box Advisory Services, we always recommend that you consulta relevant accounting advisor to make sure you are making the most suitable decision for your business. to our monthly newsletter where we share exclusive small business and contractor advice! Disclaimer: Please note that every effort has been made to ensure that the information provided in this guide is accurate.

You should note however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. A unit trust is a form of fixed trust , as the interest a beneficiary has in the trust is determined by the number of units held. As the name suggests, a discretionary trust gives the trustee a lot of choice about how they distribute profits. Discretionary trust v fixed trust. However, as compared to a discretionary trust , a unit trust does not offer the same sort of flexibility or asset protection (as the units themselves are an asset of a unit holder and could become available to creditors of that unit holder, unlike with a discretionary beneficiary of a discretionary trust ). How is a unit trust established?

A unit trust is a form of fixed trust , as the interest a. A fixed trust is one in which each beneficiary has a fixe or proportionate, interest in the income and capital of the trust. A hybrid trust , as the name suggests, is generally a hybrid of a discretionary and a unit trust. The term “hybrid trust ” is a generic term for a trust which has elements similar to both discretionary and unit trusts , and there are many different forms of hybrid trusts.

The company constitution and trust deed may be obtained from “off the shelf” providers but may need to be amended to take into account the individual circumstances of the business. An example would be a clause in the trust deed that says, ” Trust income is the same as net income per sITAA36. Previously this was not the case and full stamp duty would apply to such a change.

Similarly, if a corporate trustee becomes insolvent and there is insufficient trust property to satisfy a third party creditor, the creditor may elect to trace a claim against the. From a business standpoint, a fixed structure, such as a fixed unit trust , may be more appropriate where the beneficiaries are unrelated third-parties sharing property and shares. For more information, check out our guide on discretionary trusts to learn more about this structure. A unit trust by subscription is created when the unit holders subscribe for units in the trust , and execute (i.e., sign and date) the trust deed.

Unlike a beneficiary of a discretionary trust , who has no proprietary interest in the property of the discretionary trust , a unit holder in a unit trust may have a proprietary interest in that property, generally being a relevant proportion of all the property of the unit trust (although this will depend on the terms of the trust deed).