Unit Holders Agreement

TRUST DEEDS

Most trusts are created for clients by the execution of a deed of trust by the trustee, the deed setting out the express terms of the trust, and by the “settlement” on the trustee of a nominal sum, say $10, by the “settlor”, who is also a party to the deed. It is common practice for a trust to be established by the settlement of a nominal sum, say $10, with the trustee on the creation of the trust while the other assets of the trust are transferred later by way of purchase, with the necessary funds being loaned to the trust for the purpose. The reason it is done this way is to minimise (stamp) Duty.

Discretionary Trusts

Discretionary trusts are trusts under which the trustee has a “discretion” as to the way the trust property, usually both the capital and the income of the trust fund, will be distributed. This discretion gives the trustee a power to decide the proportions in which the trust fund will be distributed, or “appointed”, among the beneficiaries. The basic machinery of a discretionary trust is a power of appointment. A power of appointment is an authority vested in a person to deal with or dispose of property. Often the trust will then use language to the effect of, “including power to appoint in favour of one to the exclusion of all others”. As a result, no beneficiary or object of a discretionary trust has any entitlement to any specific part of the trust property, whether capital or income, unless and until nominated by the trustee.

A discretionary trust is most suited to a family situation as a business relationship will require more certainty and security in financial dealings affecting trust property.

None of the beneficiaries can demand anything from the Discretionary Family Trust. It is the Trustee (acting under the advice of the Appointor) who decides who gets what. Therefore, your class of beneficiaries can be as wide as possible.

Unit Trusts

The flexibility of a unit trust often results in its choice as the preferred structure for many commercial ventures where the units are generally held by the trustee of each investor’s family discretionary trust.

A unit trust created by the precedent is created by a deed between a trustee and the “initial unit holder” who contributes an amount of money which establishes the trust and creates units held by the initial unit holder. Thereafter, units can be issued to the other investors. There must be no more than 20 unit holders. Under s 601ED of the Corporations Act 2001 (Cth), the unit trust must be a registered managed investment scheme if there are more than 20 unit holders. 

Settled sum

A trust will only continue to exist where there is trust property. If the settled sum is placed in the trust general bank account and that bank account goes into overdraft, the trust will cease to exist.

A popular method of avoiding this problem is as follows: The $10 or other nominal amount, comprising the settlement sum should be kept in the trustee’s file; this will ensure that there is always some trust property in existence, and evidence of the trust being settled.

Trustee

The Trustee is normally a company, created especially for the purpose. The company passes a resolution agreeing to take on the role of Trustee of the Trust.

Upon accepting the trust, the trustee will be obliged to take possession of any trust property, and to ensure that any trust property is duly conveyed to them. This extends to debt recovery where money is owed to the trust.

The duty to invest the trust fund properly involves balancing of several competing factors. Trustees are required by statute to have regard to a range of matters when considering any exercise of the power of investment.  See s 14C of the Trustee Act 1925 (NSW).

Settlor and Appointor

A Settlor should never be a beneficiary, See s102(1) Income Tax Assessment Act (1936). It is prudent not to make the settlor of a trust the appointor, if the trust is to include an appointor. Particularly if the trust is a discretionary trust in which the trustee has power to add beneficiaries. The settlor could then, as appointor, appoint themselves as trustee, add themselves as a potential beneficiary and then, assuming the trust is a discretionary trust in which the trustee can distribute all the trust property to one beneficiary to the exclusion of all others, resolve to distribute all the trust property to themselves. The law requires that the settlor must display a sufficiently certain intention to create a trust. While no magic words are necessary, in a deed of trust it is prudent to use words clearly indicating an intention to create a trust, such as “To hold upon trust for” and similar.  If words displaying such an intention are used, but the tenor of the whole instrument is such that no trust is in fact intended, the supposed trust will fail for want of sufficient certainty of intention to create a trust. Where, for instance, a settlor transfers property to a nominated trustee upon trust in accordance with the terms of a deed, but the terms of the deed are such that the settlor can, by his own action, recover all the property of the trust and in effect unravel the trust, or prevent the trustee from making any distribution in favour of the nominal beneficiaries, the trust may be held to lack the necessary certainty of intention.

Stamping

The precedent documents include a Statutory Declaration by a director of the trust to the effect that the only assets of the trust at the time of execution was the $10 paid to it by the settlor. The Office of State Revenue charges ‘nominal’ duty on all trust deeds if the amount of trust property does not exceed a certain threshold.

A Declaration of Trust (Trust Deed) is a dutiable transaction and generally liable to full duty based on the value of the dutiable property the subject of the trust.  See s8(1)(b) of the Duties Act 1997.

The dutiable value on the transfer of shares or units is the greater of the market value or consideration paid for the shares or units. The transferee is the person liable to pay the duty. Duty must be paid within 3 months of the date of first execution of the agreement or transfer.