A unit trust is like a company where the trusts property (business or investments) are divided into a number of shares called units. The number of units you hold will determine your entitlement to your share of income, capital gains and voting power. Units in a unit trust can also be categorised.
The taxation benefits are generally not as flexible as a discretionary trust in that any income distributions must be distributed to unit holders as per their share of units. However if a discretionary trust was a unit holder you can achieve the same flow through tax benefits.
The main advantage of the unit trust over other types of trusts is that the parties involved are issued with units:
- Define that party’s interest in the assets and income of the trust;
- Can be easily transferred; and
- Can be re-acquired by the trustee.
Other benefits of a unit trust include the following:
- Less regulation than a company;
- Taxation advantages over a company (in some cases);
- The trust deed can be tailored to the needs of principals and beneficiaries;
- No legal problems with redeeming units from the unitholder; and
- Easier to wind up than a company.
From an asset protection point of view, unit trusts don’t provide the same kind of asset protection as a discretionary trust. If a unit holder is made bankrupt, then that persons units will be treated like any other assets and sold to raise funds to pay creditors.