Understanding the Cleardocs trusts : Part 1 of 2 — a comparison table of key benefits and things to be wary of

Key benefits

Flexibility: The trustee has full flexibility when distributing income and capital, including to whom and in what proportions.

Asset protection: No single beneficiary (or group of beneficiaries) has any claim to the assets of the trust. Accordingly, the trust assets in most cases do not form part of a beneficiary's personal assets, and are not available to the beneficiaries' creditors.

Income tax reduction: Because the trustee has a discretion as to whom distributions are made, the trustee is free to choose distributions which reduce the overall tax liability of, say, a family.

Defined entitlements: Unitholders have a fixed, proportional interest in trust income and capital.

Deductibility on borrowing costs of acquiring units: for example, as a unitholder is entitled to a fixed distribution of assessable income they can claim tax deductions for expenses or outgoings incurred in gaining or producing that assessable income.

Income tax reduction is possible: Although the unitholder will be liable for distributions held and maintained by it, if the unitholder is a discretionary trust, then the distributions can be distributed to the discretionary trust beneficiaries and the overall income tax liability reduced as explained in the column to the left.

Transferable interests: Unitholders may transfer their units.

Less regulation: Less regulatory impediments to operate the trust in comparison to companies.

Divert some income: The trustee may issue income units, and the trustee may distribute income to the income unitholders, to the exclusion of the ordinary unitholders. (The trustee does not have to issue income units.)

After a distribution to income unitholders, the trustee may make distributions to ordinary unitholders, and must do so in proportion to unitholdings.

Transferable interests: Unitholders may transfer their ordinary units.

Less regulation: Less regulatory impediments to operate the trust in comparison to companies.

Less costs: Combines the features of both a unit trust and discretionary trust — avoiding the need for a unit trust in which discretionary trusts own the units. This reduces overheads — for example: company trustee registration, stamp duty, tax returns.

Good features combined: Combines the useful feature:

• of a defined proportionate interest of unitholders,
• with the trustee's discretion as to which persons in a class receive distributions.

Income tax reduction: Because the trustee has a discretion as to which persons in a class of beneficiaries receive distributions, the trustee is free to choose distributions which reduce the overall tax liability of the persons in that class.

Structural change: Simple to temporarily change proportional entitlements with reduced resettlement issues.

Transferable interests: Unitholders may transfer their units.

Less regulation: Less regulatory impediments to operate the trust in comparison to companies.

More detail? You can read more information on these key benefits in an earlier ClearLaw article.

Things to be wary of

Mere expectancy only: Because the trustee has an absolute discretion to decide which beneficiaries receive distributions, the beneficiaries don't 'own' anything. Their interest cannot be:

• left to their estate,
• transferred,
• used as security for borrowing, nor
• guarded against competing beneficiaries.

Less asset protection: A unitholder owns their units, and because they have a defined interest, those units have a value. The units are therefore an asset available to the unitholder's creditors (in the event the unitholder is sued, or becomes bankrupt).

Not a fixed trust, no deductibility for unitholders' borrowing costs: Because income unitholders may receive distributions of income, the ordinary unitholders do not have a fixed entitlement to income. Therefore, the unitholder cannot claim a tax deduction for borrowing costs associated with acquiring their units.

Less asset protection: An ordinary unitholder owns their ordinary units. Those ordinary units have a value because they:

• have a defined interest in trust capital, and
• an expectation in respect of trust income.

The ordinary units are therefore an asset available to the ordinary unitholder's creditors (in the event the ordinary unitholder is sued, or becomes bankrupt).

Hybrid trusts — no two are alike! The term 'Hybrid Trust' does not refer to one particular type of structure. There are many types, and 'Hybrid Trust' means different things to different people. Therefore, it is crucial that you understand the type of structure that is established under the Cleardocs Hybrid Trust package.

Not a fixed trust, no deductibility for unitholders' borrowing costs: Because unitholders may not receive any distributions of income or capital themselves, they obviously do not have a fixed entitlement to income. Therefore, the unitholder cannot claim a tax deduction for borrowing costs associated with acquiring their units.

More detail? You can read more information on these key benefits in an earlier ClearLaw article.