Introduction

In the complex world of international estate planning, fixed unit trusts offer a straightforward and secure way to manage and distribute assets. These trusts provide clear entitlements, making them distinct from more flexible structures like discretionary trusts. This guide explores the essential features of fixed unit trusts, their benefits, and the steps required to establish them. It will help you understand how fixed unit trusts can be effectively utilised in managing your estate across borders.

Understanding Fixed Unit Trusts

A fixed unit trust is a type of trust where the assets are divided into units, and the beneficiaries hold these units to represent their share in the trust. This arrangement is distinct from discretionary trusts, where the trustee of the trust has flexibility in distributing trust income and capital.

In a fixed unit trust, the trust deed clearly specifies the proportion of income and capital each beneficiary is entitled to receive. Beneficiaries of the trust purchase units and their entitlement to the trust’s assets corresponds to the number of units they hold. For instance, if a trust has 100 units and a beneficiary owns 25 units in the unit trust, they are entitled to 25% of the assets and income of the trust.

Essential Requirements for Fixed Unit Trusts 

A fixed trust, especially under a unit trust framework, must comply with specific provisions outlined in the Land Tax Management Act 1956 (NSW) to be recognised as a “fixed trust.” These requirements ensure the trust’s structure clearly defines and secures the entitlements of its unit holders. Below are the key requirements:

1. Fixed Entitlement to Income and Capital: The terms of the trust deed must state that unit holders are entitled to the income and capital of the trust. These entitlements must be fixed, meaning they cannot be changed by any discretion exercised by the trustee or other parties. This provision ensures that beneficiaries’ interests are secure and predictable.
2. Right to Redeem Units: Unit holders must be able to redeem their units at any time, independent of the trustee’s or other unit holders’ discretion or approval. This right provides unit holders with liquidity and the flexibility to exit their investment when needed.
3. No Compulsory Redemption by Trustee: The trustee cannot compulsorily redeem units from unit holders. This safeguard protects unit holders from being forced to sell their units against their will, maintaining their investment security.
4. Right to Wind Up the Trust: Unit holders must have the authority to demand the winding up of the trust and distribute the trust property or net proceeds before the vesting date. This provision gives unit holders control over the trust’s duration and the ability to conclude its operations if desired.
5. Single Class of Units: The trust must issue only one class of units, generally referred to as ‘general’ or ‘ordinary’ units. This ensures that all unit holders have equal rights to the trust’s income and capital distributions.
6. Prohibition on Issuing Additional Classes of Units: The trust deed must prohibit the issuance of additional classes of units or the reclassification of existing units. This maintains uniformity and prevents creating preferential or subordinate rights among unit holders.
7. Equal Voting Rights: All units must carry equal voting rights, particularly concerning decisions on winding up the trust. This ensures fair and equitable participation of all unit holders in significant decisions affecting the trust.
8. Equitable Entitlement and Land Ownership: In fixed unit trusts, unit holders are considered ‘owners’ under the Land Tax Management Act 1956 (NSW), giving them an equitable entitlement to the land held by the trust. This legal status distinguishes them from unit holders in other types of unit trusts, who typically do not have ownership rights to specific trust property.
9. Role of the Grantor: The grantor of the trust must provide clear instructions on:
   • Distribution Schedule: How and when the trust’s income is distributed.
   • Asset Division: Allocation of the trust’s assets among beneficiaries.
   • Additional Conditions: Any specific conditions or parameters governing the trust’s management and operation.

Types of Fixed Unit Trusts 

Life Interest Trust

A life interest trust, also known as a life tenant trust, is designed to provide for one or more beneficiaries (life tenants) during their lifetime, with the remaining assets passing to other beneficiaries upon the life tenant’s death or a specified event.

The life tenant receives income from the trust’s assets or has the right to use the assets during their lifetime. Upon the death of the life tenant, the remaining assets are transferred to other beneficiaries, as predetermined in the trust deed.

A common scenario is where a spouse inherits the estate’s income, and after their death, the estate passes to the children. This arrangement ensures that the assets eventually reach the intended heirs, such as the children, rather than potentially going to future stepchildren or other parties if the spouse remarries.

Conditional Trust

A conditional trust, also known as an incentive trust, places specific conditions on the distribution of assets to beneficiaries. The trustee manages the assets until the beneficiaries meet the stipulated conditions.

Conditional trusts are often used to encourage certain behaviors or milestones in beneficiaries’ lives. The conditions can range from educational achievements, such as graduating from college to personal milestones, like marriage or having children.

As the grantor, you can tailor the conditions to fit your goals and values. For instance, you might require beneficiaries to achieve a certain educational level or demonstrate financial responsibility before receiving their inheritance. The conditions can be as simple or detailed as desired, providing a tool to influence the future actions and decisions of beneficiaries.

For instance, a grantor might specify that beneficiaries must live in the same state as a surviving parent to qualify for their inheritance, ensuring family cohesion or proximity.

Both life interest and conditional trusts offer unique advantages in estate planning, allowing grantors to ensure that assets are managed and distributed according to specific wishes and conditions. These trusts provide a structured way to protect and control the transfer of wealth across generations, aligning with the grantor’s personal and family goals.

Benefits of Fixed Unit Trusts for International Estate Planning

Fixed unit trusts are a valuable tool for international estate planning, offering clear benefits in terms of reducing conflicts, providing tax advantages, and enhancing asset protection. Below is an overview of these benefits:

Clarity and Reduced Conflicts

Fixed unit trusts provide predetermined and fixed entitlements for beneficiaries, reducing potential conflicts. This structure is particularly beneficial in situations involving unrelated third parties, as it ensures that all beneficiaries have a clear understanding of their share in the trust’s income and capital.

Tax Advantages

Fixed unit trusts offer several key tax benefits:

1. Capital Gains Tax (CGT) Discount: Beneficiaries can benefit from a CGT discount on the sale of trust assets held for more than one year.
2. Franking Credits: Trusts can pass on franking credits from dividends to unit holders, effectively reducing the overall tax burden.
3. Value-Shifting and Borrowing Deductions: These trusts provide opportunities for managing tax liabilities and claiming deductions more efficiently.
4. Carrying Forward Tax Losses: Trusts can carry forward tax losses to offset future gains, provided they meet the criteria for a fixed trust.

Asset Protection and Income Management

1. Bare Trust Arrangements: Trustees can hold distributions under a bare trust arrangement, protecting the assets until beneficiaries, such as minors, reach maturity. This provides additional security for trust funds allocated to beneficiaries who are not yet legally able to manage them.
2. Superannuation Contributions: The trust can contribute to superannuation funds for unit holders, providing a tax-efficient way to manage income distributions, as these contributions are typically taxed at a lower rate.

Land Tax Benefits

Fixed unit trusts are recognised under the Land Tax Management Act 1956 (NSW), allowing beneficiaries to be treated as having an equitable estate in the land. This classification grants access to land tax exemptions and benefits usually available to direct property owners.

Disadvantages of Fixed Unit Trust for International Estate Planning

While fixed unit trusts offer several benefits, there are notable disadvantages, particularly in the context of international estate planning. Here are some key challenges associated with these trusts:

Limited Asset Protection

Fixed unit trusts do not provide the same level of asset protection as discretionary trusts. In the event of bankruptcy, the units held in a fixed unit trust are considered assets that can be sold to satisfy creditors. This exposure can be a significant drawback for individuals seeking to shield their assets from claims.

Tax Distribution Challenges

Another disadvantage is the complexity of making tax-free distributions. Unlike discretionary trusts, fixed unit trusts have less flexibility in managing how income and capital gains are distributed. For example, while the Capital Gains Tax (CGT) 50% discount can flow through to unit holders, other reductions, such as the small business 50% active asset reduction, can still trigger a taxable event.

Lack of Flexibility in Income Distribution

Fixed unit trusts are characterised by their lack of flexibility in income and capital distribution. The unit holders’ entitlement is strictly based on the number of units they hold, with no discretion allowed in varying these distributions. This rigid structure contrasts with discretionary trusts, where trustees have the flexibility to distribute income and capital as needed, potentially optimising tax outcomes for beneficiaries.

Inability to Distribute Losses

Fixed unit trusts cannot distribute capital or revenue losses to their beneficiaries. Any losses incurred by the trust must be carried forward to offset future profits. This limitation can lead to inefficiencies, especially if negative gearing strategies are in place. Beneficiaries may need to hold debts at the unit holder level rather than the trust level to avoid locking up losses within the trust.

Mandatory Distribution of Income

All income generated by the trust must be distributed annually to unit holders. This requirement can limit the trust’s ability to retain earnings for reinvestment or other strategic purposes, potentially affecting the trust’s growth and flexibility.

How Do Fixed Trusts Work?

Fixed trusts, including fixed unit trusts, operate through a structured mechanism that involves the roles of trustees, beneficiaries, and the process of income distribution.

Role of the Trustee

The trustee is responsible for managing the trust’s assets, which may include a diverse range of investments such as stocks, bonds, real estate, or other financial instruments. The trustee’s duties include adhering to the trust deed, maintaining the trust’s financial integrity, and ensuring that the assets are managed in the best interests of the beneficiaries.

Role of the Beneficiaries

The beneficiaries of a fixed unit trust, known as unit holders, are investors who purchase units in the trust. These unit holders are entitled to a proportionate share of the trust’s income and capital / asset, based on the number of units they own. Unlike discretionary trusts, the distribution of income and capital in a fixed trust is strictly defined and cannot be altered by the trustee.

Income Distribution

Income generated from the trust’s investments, such as dividends, interest, or rental income, is distributed to unit holders according to their unit holdings. This distribution occurs at specified intervals, such as quarterly or annually. Typically, the trust deed contains the timing and method of these distributions.

Liquidity

One of the key features of unit trusts is the liquidity they offer. Units can often be bought or sold on the market, allowing investors to enter or exit the trust with relative ease. This liquidity is a significant advantage, particularly for investors seeking flexibility in their investments.

Case Study: Unit Trust of Samoa (UTOS)

The Unit Trust of Samoa (UTOS) is an example of a fixed unit trust established to provide Samoans with access to investment opportunities. Approved by the Minister of Finance and operational since 2010, UTOS allows individuals, families, and organisations to invest in a managed portfolio of assets.

UTOS Structure and Functioning:

• Unitholders: Must be of Samoan descent or permanent residents, and each must hold a minimum of 25 units.
• Investment Management: The money pooled from unit holders is invested by the Manager of UTOS, who makes decisions on the investment strategy under the oversight of the Trustee.
• Trustee Role: The Trustee holds the legal ownership of the trust’s assets and ensures that the Manager’s decisions align with the trust’s objectives and regulatory guidelines. The Trustee cannot be instructed by unit holders to manage the trust’s assets in a specific manner, preserving the impartiality and professional management of the trust.

This structure ensures that all unit holders benefit proportionally from the investments made by the trust, while the professional management handles the complexities of investment decisions.

Fixed trusts like UTOS are designed to provide investors with a secure and structured way to invest, offering clear benefits in terms of income distribution, asset management, and liquidity. The trust’s structure ensures that the assets are managed prudently, with the interests of the unit holders as a priority.

Fixed Unit Trusts vs Discretionary Trusts 

Aspect	Fixed Unit Trusts	Discretionary Trusts
Ownership and Control	Unit holders have fixed ownership similar to shareholders in a company. The trustee acts according to the unit holders’ directions.	Beneficiaries have no ownership rights. The trustee has full control over how the income and capital are distributed.
Distribution of Income and Capital	Income and capital are distributed based on unit holders’ fixed proportions as per the terms of the trust.	The trustee decides how to distribute income and capital among beneficiaries, providing flexibility.
Flexibility and Asset Protection	Less flexible, with harder asset protection since ownership is fixed in accordance with the unit trust deed.	More flexible and offers better asset protection due to the trustee’s control over distributions.
Taxation	Unit trusts are taxed at the corporate tax rate, and unit holders receive distributions of after-tax income.	Discretionary trusts distribute income to beneficiaries, who are taxed at their individual marginal rates, which can be more tax efficient.
Capital Gains Tax (CGT)	Capital gains are taxed at the trust level, with unit holders receiving a credit for the tax paid.	Capital gains can be distributed to beneficiaries in lower tax brackets, potentially reducing overall tax liability.
Use in Business Structures	Often used for pooled investments or business ventures where fixed ownership and transparency are desired.	Less commonly used in public investment contexts due to the lack of fixed entitlements; more suited as a family trust or for personal asset management.
Applicability for Asset Protection	Provides limited asset protection; assets are more exposed to creditors.	Offers significant asset protection, as beneficiaries do not have a fixed entitlement, making assets less accessible to creditors.
Estate Planning	Provides predictable outcomes in estate planning due to fixed entitlements.	Useful for tax-effective intergenerational wealth transfer, with the trustee able to tailor distributions to minimise taxes.

How to Establish a Fixed Unit Trust?

Establishing a fixed unit trust involves several key steps, including subscription, setting up a bank account, managing investments, and considering tax registration. Here’s a detailed guide to help you understand the process:

Subscription Process

Most fixed unit trusts are established by subscription, where initial unitholders, known as subscribers, purchase units in the trust. This process is similar to shareholders buying shares in a company. The subscribers pay a set amount for each unit to the trustee, who then issues the requisite number of units.

Units in a trust can be partly or fully paid and may be divided into different classes with varying rights, such as voting, income, or capital rights. However, in a typical fixed unit trust, like those structured for NSW land tax purposes, only one class of units is issued, and these units are usually fully paid and have equal rights.

Setting Up a Bank Account

Once the trust deed is executed, the trustee should establish a bank account in the name of the trust. This account is crucial for managing the trust’s financial transactions.

• Bank Account Naming: The account should be named in a manner that clearly identifies it as belonging to the trust. For example, “ZBC Pty Ltd as Trustee for the FGH Unit Trust.”
• Opening Procedures: The bank will require specific documentation to open the account. If a corporate trustee has been newly established, the company provider may assist by providing a bank kit.
• Tax Compliance: It is essential that the trust’s bank account is used exclusively for trust-related transactions to maintain the integrity of the trust and comply with tax regulations.

Investment Management

Trustees typically have broad powers to decide on investments, as specified in the trust deed. However, they must exercise prudence and care in making investment decisions, similar to the standard expected of a prudent person managing their own investments.

The trustee must ensure that investments are made with due diligence, considering their skills and knowledge to act in the best interests of the beneficiaries.

Tax Registration Considerations

The trust may need to register for various tax obligations, depending on its activities and structure. These may include registration for Goods and Services Tax (GST), Pay As You Go (PAYG) withholding, and others. It is advisable to seek guidance from an accountant to ensure all necessary registrations are completed and that the trust complies with tax laws.

By following these steps, you can establish a fixed unit trust that is compliant with legal and financial regulations, providing a structured and efficient means of managing and distributing assets.

Key Takeaway: Fixed Unit Trusts May be the Right Type of Trust for Your Estate Planning Needs

Fixed unit trusts provide a clear and structured approach to asset management, making them an excellent choice for those seeking predictable and secure estate planning solutions. While they offer several benefits, including tax advantages and reduced conflicts among beneficiaries, they also come with limitations, such as less flexibility and lower asset protection compared to other trust types. If you are considering establishing a fixed unit trust as part of your international estate planning strategy, reach out to PBL Law Group for support. es more significant in safeguarding the interests of beneficiaries and maintaining the trust’s integrity. For detailed guidance on implementing a trust protector in your estate planning and choosing the right jurisdiction, PBL Law Group is here to guide you with the right legal advice.