Trust is a familiar concept that many of you must have heard about; however, the story becomes different when it comes to its types. The difference in the types arises due to their way of commercial dealings, privacy, asset protection, tax efficiency and succession planning.
Depending upon the type of asset and transactions, you can choose an appropriate trust to run your business. In this article, we clear the common confusion between the two most famous types of trusts, discretionary trust and unit trust.
What Is a Discretionary Trust?
A discretionary trust allows the trustee(s), who manages the trust, to choose how much money the beneficiaries should receive and who will benefit from the trust. Discretionary trusts and family trusts are often considered the same.
The primary beneficiaries get most of the benefits from this type of trust. On the other hand, the secondary beneficiaries are the primary beneficiaries’ relatives. Lastly, the tertiary beneficiaries are usually the related trusts, companies and other entities.
Advantages
Here are some of the advantages that discretionary trust has to offer.
- This business structure allows a person to hold onto their assets minus the responsibility of being the actual legal owner.
- While companies must pay income tax each financial year, this is not the case for discretionary trusts. This type of trust generally does not pay taxes; however, the beneficiaries cannot escape paying them. They have to pay taxes on their share of the trust’s net income.
- When the trust is running a family business, the trustee can distribute the assets. Doing this will result in lower overall tax paid by the members.
Disadvantages
The following are considered to be the disadvantages of having a discretionary trust. Some people do not think of these as negatives, but it is still better to know about them.
• The appointer has ultimate control since he can change the trustee.
• The beneficiaries get strong asset protection, but not the trustees. As the legal owner of the trust property, trustees are liable for their personal debts. Thus, to reduce this liability, a company trustee is used rather than a person trustee.
What Is a Unit Trust?
Unit trusts are the best structure for investments like property developments or business ventures. Unit trusts allocate the shares to the beneficiaries as per a trust agreement.
A unit is a property that a trustee can sell and buy. The unit holder of trust gets the benefit proportionally to his units.
Is a unit trust a fixed trust? This question is asked frequently. A unit trust can be called a fixed trust if all the unit holders get a fixed right to both the income and the capital of the trust.
Advantages
Compared to a discretionary trust, a unit trust gives more certainty regarding the benefit the beneficiary receives.
• In this type of trust, there is no worry about the unit holder exiting.
• The taxable income from the unit trust flows through to the unit holders in accordance with their units.
• Best for two unrelated parties who want to combine their resources in the name of investment.
Disadvantages
There is only one major disadvantage, which is:
• The trustee makes all the decisions, which does not give the beneficiary complete control.
If you wish to accurately fulfil your tax obligations as a trust, reach out to Clear Tax Accountants, a team of small business accountants in Melbourne.
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