We’ve all heard of Trusts but what are they in practice? Do we need them? Is there only one type of a so called Trust?
This post will look at Unit Trusts – only one of the variables within the Trusts’ umbrella.
A Unit Trust is a trust in which the trust property is divided into a number of defined shares – units. Beneficiaries subscribe to these units. A beneficiary is then entitled to the income and capital of the trust in proportion to the number of units they hold.
So why a Unit Trust? – Beneficiaries interests are clearly defined, can be easily transferred and can be reacquired by the trustee. Also important to note that trusts by nature, don’t have the highest form of regulations as company structures do.
(Cont’d) Why not a Unit Trust? One of the main pitfalls is to do with asset protection. Units are considered assets of the beneficiary. Hence, should a beneficiary be sued or be declared bankrupt – their unit/s will be part of their total asset pool and may be sold off to fund their creditors. Further, from an income splitting perspective – unit trusts don’t allow income splitting on a discretionary basis (as do Discretionary Trusts).
Most important thing about setting up any Trust and not just a Unit Trust – is to have a properly made up Trust Deed. A Trust Deed specifies who indemnifies who, who owns what and how much, as well as the role and procedures of the Trust. You can find generic Deeds online for as little as $150, but it is these generic Deeds that get people into a lot of trouble (and headache) when problems arise. A visit to the solicitor is always highly recommended so as to draft the Deed to suit you and your long term circumstances.