What is a Unit Trust?

A Unit Trust is similar to a Family Trust but is used for businesses rather than a family. The Unit Trust is simply the extension of a Family Trust into the field of commerce.

One or two people, usually a husband and wife, control a Family Trust. The husband and wife have complete discretion how they distribute income each financial year. Such "trust" is not usually shared outside a family! Hence the need for a Unit Trust.

At the end of each year, income is distributed to the Unit Holders in proportion to the units that the beneficiary holds. The Trustee has no discretion. Units may be held by Family Trusts, Companies or by individuals.

The trustee is given the power to distribute trust income and capital to beneficiaries as a proportional amount that is relative to the number of units held by each beneficiary.

Click here to view a diagram of a Unit Trust.

A Unit Trust has:

• Negotiability (you can buy and sell units)
  
• Fixed annual entitlements to income and capital
  
• Unitholder liability (the owner of the units can be liable to pay any shortfall of assets if the Unit Trust is unable to provide funds to cover debts)
  
• Discretionary units, however the discretion is restricted to income (not capital).
  

Well constructed Unit Trusts include mechanisms for cashing in (redemption) and transferring the units. Of particular importance is the procedure for determining the price at which units are to be redeemed. Further, the people holding units can participate in the profits of the business on a set percentage.

The key difference between the types of trusts is that with the discretionary trust, it is the trustee who chooses which beneficiaries will receive interest and how much interest they will receive. In contrast, with unit trusts, it is the beneficiaries who choose how much interest they wish to invest and therefore determine the proportion of “units” that they want to hold.

Unit Trusts are sometimes compared to Companies. On the face of it, owning units in a Unit Trust is similar to owning shares in a company. However, a unit in a Unit Trust is fundamentally different to a share in a company. A shareholder has no interest in the assets of the company whereas a Unit Holder has a proprietary interest in all the trust property. Therefore, unit holders can lodge a caveat over land held in the Unit Trust where a shareholder in a company has no such right to do so.

Differences between Unit Trusts and Companies are:

• A trust comes into existence as the result of a private agreement rather than a government Act. Therefore, there is less governmental regulation of trusts.
  
• A company is a legal entity in itself. A trust is not a separate legal person and offers more flexibility.
  
• In a Unit Trust the trustee holds property, such as shares in a company, on trust for the Unit Holders. The Unit Holders are regarded, like beneficiaries under a trust, as equitable owners of the investments held by the trustees.
  
• A company is linked together by a contract in the company's Memorandum and Articles. On the other hand, investors in a Unit Trust are not necessarily in any contractual relationship with each other.
  
• Although a trust is not a corporation or company, a person connected with a trust may be a company.
  
• You can sell both shares in a company and units in a Unit Trust. You can draft your Unit Trust so that you have to offer your units to other unit holders before you sell them on the open market. Shareholders in a company can enter into similar restrictions through a shareholders' deed.