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What is a unit trust?

June 29, 2022   Maria MubeenPhilip Evangelou

A unit trust is a type of trust whereby the trustee holds trust funds or capital for the benefit of the beneficiaries.The interests of the beneficiaries are appropriated into fractions and are referred to as ‘units’ – therefore, beneficiaries are referred to as ‘unit holders’. Unit holders retain a fixed interest in all property which is the subject of the trust.

To put it simply, a trustee holds trust assets for the benefit of the beneficiaries and distributes trust assets based on the units held by unitholders – there is no exercise of discretion on behalf of the trustee.

To illustrate this point; If beneficiary A holds 75 units whilst beneficiary B holds 25 units , beneficiary A owns 75% of trust assets, whilst beneficiary B holds 25%. The distribution of trust funds or capital will reflect this i.e. Beneficiary A is entitled to 75% of the trust profits whilst B will be entitled to 25% of the profits. Trustees have no discretion as to selection of the beneficiaries or the amounts distributed to the unit holders.

Benefits of a unit trust

Unit trusts are commonly used as a business vehicle by unrelated parties intending on running a business together. Some of its benefit include:

  • Well diversified: unit trusts are are able to invest in a variety of investments including but not limited to stocks, bonds, commodities etc. this in turn reduces the risk of investing by having the investments spread out 
  • Professionally managed: unit trusts are managed by a funds manager ensuring that all relevant issues are dealt with correctly and make important decisions when necessary 
  • Only need a small investment: unlike other initial investments that require $1000 plus to make an investment. Unit trusts require as little as $100 to begin an investment.

How do you set up a unit trust?

  1. Unit trust roles 

Within a unit trust the two roles are a trustee and the unitholder

  • Trustee: the legal owner of a unit trust. They have a legal liability in their capacity as a trustee and have the responsibility of the trust property for the unitholder. 
  • Unitholder: the person or entity who holds the legal benefit in the relationship. They contribute to the trust by purchasing units.
  1. Drafting the trust deed

The trust deed that establishes the unit trust sets out the following:

  • Powers of the trustee to manage the trust
  • Rights attaching to various units
  • Trust’s vesting
  1. Preparing other documents 

This process will also require a few other documents such as:

  • Application forms for units
  • Certificates for units held
  • Register of unitholders
  1. Settle the trust 

In some instances a settler may be required to complete this part of the process depending on the terms of the trust.

  1. Shareholders and unitholders agreement 

A shareholders and unitholders agreement details the decision making and control procedures of each trust. These agreements are put in place to provide shareholders and unitholders with additional rights and protections. Some of which may include:

  • Restrictions on the transfer of shares and units 
  • Rights to appoint the directors of the corporate trustee 
  • Pre-emptive rights on the issue of shares and units
  1. Stamp duty charges 

Each state in Australia will have certain stamp duty charges which will need to be paid within a certain time period after the establishment of the trust.

  1. Additional registration 

After the unit trust has been set up you can then acquire a bank account for that trust and apply for any additional registrations. 

About Maria Mubeen

Avatar photoMaria is a legal intern at Openlegal and is currently in her third year studying Law and Business at UTS. Her interests are commercial law, contract law, and litigation.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.