Understanding the Cleardocs trusts: Part 2 of 2 — A comparison table of features

Cleardocs offers 4 different types of trusts — a Hybrid Trust, a Discretionary Trust, a Fixed Unit Trust and a Non-fixed Unit Trust. Although you must always consult with a lawyer for advice about the suitability of a trust product for your needs, this article is a useful tool to compare the key elements of each type of trust.

Remember, all trusts operate differently, depending on what the relevant trust deed says — this is particularly true of hybrid trusts which vary enormously. This article is only about the trusts Cleardocs provides.

 

The following table will help you to distinguish between the different forms of trusts which Cleardocs offers, and to identify the relative features, benefits and implications of each trust. The table also provides a good point of reference for comparisons with other forms of trusts.

Part 1 of this article (Understanding the Cleardocs trusts — a comparison table of key benefits and things to be wary of) appeared in ClearLaw February 2010. You can read Part 1 here.

Feature Discretionary Trust (also known as a family trust) Unit Trusts Hybrid Trust
Fixed Unit Trust Non-fixed Unit Trust
Establishment The Cleardocs Discretionary Trust is established when:
  • the settlor pays the settled sum to the trustee; and
  • the trustee consents to be the initial trustee of the trust.
The Cleardocs Fixed Unit Trust is established when:
  • The initial unitholders jointly pay the settled sum of $10 to the trustee to establish the trust;
  • the initial unitholders pay for, and the trustee has issued to them, the number of fully and partly paid units in the trust; and
  • the trustee consents to be the initial trustee of the trust.
The Cleardocs Non-fixed Unit Trust is established when:
  • the initial ordinary unitholders jointly pay the settled sum of $10 to the trustee to establish the trust; and
  • the trustee consents to be the initial trustee of the trust.
Then, immediately after the deed is executed:
  • the initial income unitholders each pay $1.00 to the trustee; and
  • the trustee issues one income unit to each initial income unitholder.
The Cleardocs Hybrid Trust is established when:
  • the settlor pays the settled sum to the trustee;
  • the trustee consents to be the initial trustee of the trust; and
  • the trustee issues the initial units to the initial unitholders in consideration for the settled sum.
Settlor Yes. Yes, the unitholders jointly. Yes, the unitholders jointly. Yes.
Appointor Yes, there may be up to 3 appointors.

The appointor has power to remove a trustee and appoint a new one.

The appointor may appoint a person as an additional or replacement appointor by deed.

The appointor may also appoint a person as a replacement by will.

Not applicable. Not applicable. Not applicable.
Unitholders Not applicable. Has one class of ordinary unitholders, each with the same rights and obligations.

Each unitholder has a fixed (proportional) entitlement to trust income and capital.

Has the ability to create two classes of unitholders, namely:
  • "income unitholders" who may, at the trustee's absolute discretion, receive distributions of income of the trust; and
  • "ordinary unitholders", with rights to capital distributions, and income distributions (after the income distributions to the income unitholders, if any), in proportion to their unitholdings.
Has one class of ordinary unitholders, each with the same rights and obligations.

Unitholders do not have a fixed entitlement to income or capital.

Instead, for each unitholder there is a class of beneficiaries (with that class defined by reference to their relationship to the unitholder).

That class has an entitlement to a proportion of all income and capital distributions (by reference to the unitholder's unitholding).

However no person in that class has a fixed entitlement to those distributions: the trustee has an absolute discretion as to which member, or members, receive distributions and in what proportions.

Also, the proportional entitlement of a class can be varied if unitholders who hold 75% of the issued units agree.

Beneficiaries The beneficiaries of the trust are:
  • the named beneficiaries; and
  • persons who are members of any of the class of eligible beneficiaries.
Eligible beneficiaries are defined by reference to their relationship with the named beneficiaries — for example:
  • children and spouses, etc; and
  • companies in which beneficiaries have shares etc.
Beneficiaries are limited to the unitholders. The beneficiaries are limited to:
  • ordinary unitholders; and
  • income unitholders (if any).
The beneficiaries are:
  • each unitholder; and
  • each class of eligible beneficiaries, as defined by reference to their relationship with the unitholders are for example:
    • children and spouses, etc; and
    • companies in which beneficiaries have shares etc.
Excluded beneficiaries Settlor and, as an option, the trustee. Not applicable. Not applicable. Settlor.
Adding beneficiaries / unitholders The trustee may at any time nominate one or more persons (except the settlor) as an additional class of eligible beneficiaries.

If there is an appointor, the trustee must not nominate an additional class of eligible beneficiaries without the consent of the appointor. The power must be exercised with caution in view of the resettlement issues. For a useful ATO article about resettlement, see Creation of a new trust - Statement of Principles August 2001

See issuing of units and transfer of units, below. See issuing of units and transfer of units, below. See issuing of units and transfer of units, below.
Retirement / resignation of trustee A trustee may resign as trustee of the trust by giving the appointor notice.

However, unless there is a remaining trustee, the resignation is only effective when a new trustee has been appointed.

Same for each type of Unit Trust

A trustee may retire by giving the unitholders 3 months' written notice, or such shorter period as specified in a special resolution of the unitholders.

However, unless there is a remaining trustee, the resignation is only effective when a new trustee has been appointed.

The trustee may retire by giving the unitholders 1 month's notice. On retirement, unitholders holding 75% of the units in the trust fund may appoint another trustee.
Removal of trustee The appointor may remove a trustee at any time by signing a statement to that effect. Same for each type of Unit Trust

The unitholders may remove a trustee at any time in accordance with law or by passing a special resolution.

Unitholders holding 75% or more of the units in the trust fund may remove the trustee.
Appointment of trustee If there is an appointor, the appointor, or otherwise the trustee, may appoint an additional or replacement trustee at any time by a written statement to that effect.

If there is no appointor or trustee, the first named beneficiary who is still alive may exercise this power.

Same for each type of Unit Trust

The unitholders may appoint a new trustee by passing a special resolution. They may appoint a single trustee or more than one. The appointment is effective when the new trustee executes a deed binding the trustee to comply with the deed.

The unitholders may appoint a new trustee if they hold 75% or more of the units in the trust. They may do this if the position of trustee automatically terminates, or when the trustee retires. They may also remove a trustee.
Automatic vacation of trustee position Same for all 4 trusts

A trustee's appointment terminates automatically if any of the following occurs:

  • the trustee is found to be of unsound mind, or the trustee or his or her estate becomes liable to be dealt with in any way under a law dealing with mental health;
  • the trustee becomes bankrupt or makes an arrangement or composition with his or her creditors; or
  • the trustee enters into compulsory or voluntary liquidation (except for the purposes of amalgamation or reconstruction), or has an administrator, receiver, official manager, or receiver and manager appointed to any part of its assets.
Liability and indemnity of the trustee Same for all 4 trusts

Speaking generally:

  • The trustee is not liable to the beneficiaries in respect of any loss unless it arises from fraud, gross negligence or breach of trust; and
  • The trustee is entitled to an indemnity out of the assets of the trust in respect of any liability incurred in connection with acting as trustee of the trust.
Distributions The trustee has an absolute discretion to distribute any part of the income of the trust fund for a financial year, or any trust property, in any proportions to one or more named beneficiaries or members of any of the classes of eligible beneficiaries.

However, during a financial year, the trustee may resolve to accumulate a part of the income.

When the trustee makes distributions, each unitholder is entitled to a proportion of income and capital distributions equal to their proportional holding of all of the total issued units in the trust.

However, during a financial year, the trustee may resolve to accumulate a part of the income.

Income unitholders may receive amounts of income from the trust if the trustee, in its absolute discretion, makes a determination to that effect.

Ordinary unitholders are then entitled to a proportion of the (remaining) income and to capital distributions equal to their proportional holding.

However, during a financial year, the trustee may resolve to accumulate a part of the income for that financial year.

When the trustee makes distributions of income or capital, the general rule is that the distribution must be to each class of beneficiary in proportion to the number of units the relevant unitholder owns in the trust.

However, in certain circumstances, the trustee can make distributions that are not in proportion to the number of units the unitholder owns. If the trustee determines to do this, then:

  • the trustee must first give written notice about the proposed distribution to all the unitholders; and
  • any unitholder (or person who is a joint unitholder) may veto that distribution and so prevent it from being made.

The trustee is not bound to make a distribution to any particular person. Instead, any distribution must be only to some person or persons who meet the definition of a beneficiary in the relevant class.

Issuing new units Not applicable. The trustee may create and issue additional units at any time.

Unless all the unitholders provide their written consent otherwise, the price paid for each issued unit must be equal to the redemption price immediately before the units are issued.

The trustee may create and issue additional units at any time.

Unless all the ordinary unitholders provide their written consent otherwise, the price paid for each issued ordinary unit must be equal to the redemption price immediately before the units are issued.

The trustee may issue income units. Only one income unit may be issued to each person, and only at a price of $1.

A unit which the trustee issues which is not an income unit, is an ordinary unit in the trust.

The trustee may issue additional units in the way, and on any conditions, that the trustee decides. However, the trustee may only issue additional units if either:
  • the issue is approved by a unanimous vote by all unitholders; or
  • if unitholders holding at least 75% of the units in the trust approve the issue and it complies with a pre-emptive rights procedure in which the existing unitholders are first offered the opportunity to subscribe for the units.
Transfer of units Not applicable. A holder of units may transfer units to another person with the trustee's consent. However, the units must first be offered to other unitholders at a price set by the trustee. Ordinary

A holder of ordinary units may transfer units to another person with the trustee's consent. However, the ordinary units must first be offered to other ordinary unitholders at a price set by the trustee.

Income

Income units cannot be transferred.

Certain transfers of units to persons related to the unitholder are permitted without the need for first offering the units to the other existing unitholders.

Otherwise, a unitholder who wishes to transfer units must give the trustee a transfer notice allowing the trustee to make an offer to the other unitholders.

Varying the trust deed The trustee may vary the deed at any time before the vesting date — even to the extent of revoking all the trusts it establishes by executing another deed.

If there is an appointor, the trustee must change the deed without the consent of the appointor.

Same for both Unit Trusts

The trustee may vary the deed by resolution (or by deed if it so chooses, though this is not necessary).

The resolution must be signed by the trustee or by an authorised officer of the trustee.

However, to vary any of the following, the unitholders must pass a special resolution consenting:

  • the beneficial interest of unitholders;
  • the issue, transfer or redemption of units;
  • the appointment or removal of a trustee;
  • the variation of the deed;
  • voting rights at meetings of the unitholders;
  • limitation of the liability of unitholders; and
  • termination of the trust.
If unitholders holding 75% of the units resolve or consent to amend the deed, then the trustee must execute a deed to incorporate the required amendments. This does not apply if:
  • the amendment will favour, benefit, or result in a benefit to, the trustee
  • the amendment fails to benefit all classes of beneficiary equally in proportion to the unit holdings of the effective unitholders.
The trustee must give each unitholder a notice explaining the effect of any variation within 2 months after the amending deed is executed.
Vesting / termination / winding up of the trust The vesting day is the first to occur of:
  • the end of the perpetuity period, being 80 years from the date of the deed; or
  • such earlier date that the trustee, with the consent of the appointor (if any) determines in writing.
Same for both Unit Trusts

The trust terminates 80 years after the date of the deed. It terminates at an earlier date if either of the following occurs:

  • unitholders holding at least 90% of the units on issue notify the trustee that it is to terminate on a specified earlier date;
  • the trustee decides in the interests of unitholders that it should terminate at a specified earlier date.
Unitholders have the power to wind-up the Hybrid Trust by a simple majority.

The trust vests at the end of the perpetuity period, being 80 years from the date of the deed.

Part 1 of this article (Understanding the Cleardocs trusts — a comparison table of key benefits and things to be wary of) appeared in ClearLaw February 2010. You can read Part 1 here.

More information from Maddocks

For more information, contact Maddocks on (03) 9288 0555 and ask for a member of the Maddocks Tax and Revenue Team.

More Cleardocs information on trusts — www.cleardocs.com

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You can access various ClearLaw articles for more relevant information relating to discretionary, hybrid and unit trusts:

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