Family or Unit Trust Structures

Family or Unit Trust Structures

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Family Trusts

A family trust can be a powerful tool for managing and protecting family assets, operating a business through minimising tax liabilities, and ensuring that wealth is passed down according to your wishes. However, setting up a family trust requires careful thought and planning to ensure that it serves its intended purpose and complies with relevant laws. Without proper guidance, mistakes can be costly and complicate your long-term financial, business and family goals.

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Key Considerations When Establishing a Family Trust

1. Choosing the Right Trustee(s): The trustee is responsible for managing the assets of the trust and distributing them according to the terms outlined in the trust deed. This individual or entity must be reliable, capable of handling fiduciary duties, and trustworthy.  Often, you may choose to have a company set up, to act as a corporate trustee.
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2. Selecting Beneficiaries: A family trust is typically set up to benefit specific family members, but the process of choosing beneficiaries requires careful consideration. You will need to decide who will be included, how they will benefit, and what happens if circumstances change (such as if a beneficiary passes away or a new family member is born).
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3. The Trust Deed: The trust deed is the legal document that outlines how the trust will operate, including the roles of trustees, the distribution of assets, and any conditions attached to the trust. This deed must be drafted carefully to ensure it aligns with your goals and is legally sound.
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4. Tax Implications: One of the main reasons people establish family trusts is to manage tax liabilities. However, without understanding the tax implications, you may unintentionally create an inefficient structure that costs more in taxes than anticipated.
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5. Asset Protection: A family trust can offer a level of protection against creditors, lawsuits, and other financial risks. However, this depends on how the trust is structured. Legal advice is essential to make sure that assets are properly protected under the law and that the trust is structured to prevent potential legal challenges.
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6. Trustee Powers and Responsibilities: Establishing clear guidelines for the powers and responsibilities of the trustee(s) is crucial. These powers should be balanced with safeguards to prevent misuse. This includes specifying how distributions are made, how decisions are handled, and what happens in the event of a trustee's incapacity or conflict of interest.
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7. Compliance with Legal Requirements: Family trusts are governed by specific laws, including those related to asset management, tax obligations, and the duties of trustees. To avoid any future legal issues, it is essential to ensure that the trust complies with all relevant regulations. Failing to do so could result in penalties or a dispute over the trust's validity.

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Why Legal Advice Is Essential

While establishing a family trust may seem straightforward, there are many nuances involved that can significantly affect the success and effectiveness of the trust. Without professional legal advice, you risk making decisions that may not align with your objectives, fail to provide the tax benefits you're seeking, or expose family members to unintended risks.

A qualified lawyer specialising in family trusts will guide you through the process, ensuring that all legal requirements are met, and your trust is set up properly. Legal advice helps to:

• Avoid common mistakes that could lead to disputes or costly legal challenges down the track
• Draft a comprehensive and effective trust deed
• Tailor the trust to meet your specific needs and goals, including tax minimisation and asset protection
• Ensure compliance with tax laws and other legal regulations
• Give succession planning advice about what would happen to the trust, and it’s assets, if the trustee or any of the beneficiaries died. Who would take over control?
• Provide clarity about your roles and responsibilities as a trustee or beneficiary

In short, legal advice ensures that your family trust functions smoothly and according to your wishes, protecting both your family’s assets and its future. If you are considering establishing a family trust, don’t hesitate to consult with an experienced lawyer who can help guide you through this complex process and secure your financial legacy

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Unit Trusts

A unit trust can be an effective structure for holding and managing assets, particularly in a business context. It allows for the pooling of capital from different investors, with each investor holding ‘units’ that entitle them to a proportionate share of the trust’s income and assets. While a unit trust can offer flexibility, there are important considerations to weigh before choosing this structure for your business.

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Key Considerations When Establishing a Unit Trust

1. Trust Structure and Ownership A unit trust is different from other types of trusts in that ownership is divided into fixed units, much like shares in a company. Investors hold units which entitle them to a proportion of the trust’s income, capital gains, and distributions. It’s important to determine how many units will be issued and who will be entitled to them. This decision impacts control and distribution rights, and can affect the dynamics of your business.
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2. Who Will Be the Trustee? The trustee of a unit trust is responsible for managing the trust's assets and ensuring the trust deed is followed. The trustee can be an individual or a corporate entity, but it must be someone or something that will act in the best interests of all unit holders. Choosing the right trustee is vital, as they will have significant control over the administration of the trust. Professional trustees may offer impartiality and experience, but family or business member trustees could offer more flexibility.
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3. Unit Holders’ Rights and Obligations Unlike discretionary trusts, where beneficiaries have no fixed entitlement to income or capital, a unit trust’s unit holders have a fixed entitlement. The trust deed must clearly outline the rights of unit holders, including how distributions are made, the transfer of units, and the decision-making process regarding major trust actions. Mismanagement or unclear provisions can lead to conflicts between unit holders.
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4. Tax Considerations Unit trusts can be an attractive option for tax planning purposes, as they allow for the distribution of income and capital gains to unit holders in a tax-efficient manner. However, the tax treatment of unit trusts can be complex, particularly in relation to the trust's income distribution, capital gains, and the tax status of individual unit holders. A failure to properly structure the trust or to account for tax implications can lead to unexpected tax liabilities.
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5. Liquidity and Exit Strategy One of the advantages of a unit trust is that units can be bought and sold, providing a level of liquidity. However, this may not always be ideal for a business, depending on the structure and long-term goals. If the unit trust is used in a business setting, consider whether there should be any restrictions on the transfer of units or if an exit strategy for unit holders should be outlined. Clear provisions around the sale or redemption of units are necessary to avoid potential conflicts or misunderstandings in the future.
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6. Control and Decision-Making One of the key trade-offs of a unit trust is the potential for dilution of control, as the trust’s control is divided among the unit holders. In businesses where centralised decision-making is crucial, a unit trust might not be the best fit unless carefully structured to maintain effective governance. The trust deed should establish how decisions are made (e.g., voting rights) and outline any special powers for specific unit holders or the trustee.
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7. Suitability for the Business Model While unit trusts are often used for property or investment purposes, they may not be the most appropriate structure for all types of businesses. If your business requires flexibility in ownership, income distribution, or control, other structures—such as a company or partnership—might be better suited. It’s essential to assess whether the unit trust aligns with your business goals and whether other structures could provide more benefits.

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Why Legal Advice is Essential

Given the complexity of unit trusts and the long-term implications for your business, seeking legal advice is essential. A lawyer can help ensure that:

• The trust is properly structured to align with your specific business goals.
• The trust deed is carefully drafted to reflect the rights and obligations of unit holders and the trustee, minimising the risk of disputes.
• You fully understand the tax implications of using a unit trust for your business.
• Your business maintains control while offering flexibility for unit holders.
• You comply with relevant laws and regulations governing unit trusts in your jurisdiction.

Additionally, legal advice can help you assess whether a unit trust is the right vehicle for your business or if other structures—such as a company or partnership—might be more suitable.

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Establishing a unit trust without the appropriate legal framework can lead to costly errors, disputes between unit holders, or unintended tax consequences. A lawyer specialising in trust law will guide you through the process, ensuring that the trust is legally sound, tax-efficient, and aligned with your business objectives.

If you’re considering a unit trust for your business or need advice on its suitability, don’t hesitate to reach out to one of our experienced lawyers. We are here to help you make informed decisions that protect your business and secure its future.