Introduction

Estate planning in various countries is tricky, yet fixed unit trusts offer an easy and trusty way to handle and spread out your wealth. These trusts stand out because they give clear rights to beneficiaries, unlike more flexible choices such as discretionary trusts. This guide will explain the main points about fixed unit trusts, their benefits, and how to set them up. Dive in to see how fixed unit trusts can smartly manage your estate across different countries.

Understanding Fixed Unit Trusts

A fixed unit trust is structured so that the trust’s assets are divided into portions called units. Beneficiaries in this type of trust hold these units, and the number of units they possess reflects their stake in the trust’s assets. This is different from discretionary trusts, where the trustee has more freedom in deciding how to distribute both the income and the assets of the trust.

In a fixed unit trust arrangement, the trust document clearly states exactly what portion of the trust’s income and assets each beneficiary is entitled to receive. When individuals become beneficiaries, they do so by acquiring units. The level of their entitlement to what the trust holds is directly linked to the quantity of units they own. To illustrate, imagine a fixed unit trust that is made up of 100 units in total. If a beneficiary holds 25 of these units, they are thereby entitled to 25% of both the assets and the income generated by the trust.

Key Conditions for Fixed Unit Trusts

For a trust to be considered a “fixed trust,” especially when set up as a unit trust, it needs to meet certain conditions. These conditions are laid out in legislation known as the Land Tax Management Act 1956 (NSW). These rules are in place to make sure that the trust’s structure is clear and that the rights of those who hold units are properly protected. Here are the main conditions that must be met:

1. Assured Rights to Income and Assets: The trust’s legal document must clearly state that unit holders have a definite right to the trust’s income and assets. These rights must be unchangeable and not subject to the trustee’s or anyone else’s discretion. This is to ensure beneficiaries have guaranteed and predictable interests.
2. Unit Redemption Option: Unit holders must have the option to sell their units back for value at any point. This must be possible without needing permission or agreement from the trustee or other unit holders. This provides unit holders with the flexibility to access their investment and the ability to withdraw if they choose.
3. No Forced Unit Redemption by the Trustee: The trustee is not allowed to force unit holders to sell their units. This protects unit holders from being compelled to give up their investment against their wishes, thus securing their investment.
4. Unit Holder Authority to Terminate the Trust: Unit holders must have the power to decide to end the trust and distribute its assets or the money gained from selling them before the trust’s set end date. This gives unit holders control over how long the trust exists and the power to end it if they decide it’s appropriate.
5. Single Class Unit: The trust can only issue a single category of units, typically called ‘general’ or ‘ordinary’ units. This is to make sure all unit holders have the same level of rights to the trust’s income and asset distributions.
6. Restriction on Creating More Unit Types: The trust’s legal document must prevent the creation of additional types of units, or changing the classification of existing units. This is to maintain fairness and prevent the creation of different levels of rights among unit holders.
7. Equal Say in Decisions: Every unit must come with equal voting power, especially when it comes to decisions about ending the trust. This ensures all unit holders have a fair and equal say in important decisions about the trust.
8. Equitable Entitlement and Land Ownership: In fixed unit trusts, unit holders are legally seen as ‘owners’ under the Land Tax Management Act 1956 (NSW). This gives them a form of ownership right to any land the trust possesses. This is a key difference from other types of unit trusts, where unit holders usually do not have direct ownership rights to specific trust property.
9. Role of the Grantor: The person who sets up the trust must provide clear instructions on:
   • Income Distribution Schedule: How and when the trust’s income will be paid out.
   • Allocation of Assets: How the trust’s assets will be divided among the beneficiaries.
   • Specific Rules and Conditions: Any other specific rules or conditions that will govern how the trust is managed and run.

Different Kinds of Fixed Unit Trusts

Fixed unit trusts can be designed in various ways to meet different estate planning needs. Two common types that offer specific benefits are life interest trusts and conditional trusts. Let’s take a closer look at each of these.

Life Interest Trust

A life interest trust is set up to provide for one or more people, known as life tenants, during their lifetime. After they pass away, or when a specific event occurs, the remaining assets in the trust are then passed on to other beneficiaries.

During their life, the life tenant will receive the income generated by the trust’s assets, or they may have the right to use the assets themselves. Once the life tenant dies, the assets that are still in the trust are then given to other beneficiaries who were chosen when the trust was originally created.

A typical situation where this type of trust is useful is when someone wants to ensure their spouse is provided for during their life, and then after the spouse’s death, the assets will ultimately go to their children. This kind of arrangement can be helpful in making sure that assets stay within the intended family line, such as going to children, and not unintentionally to someone else, for example, if a surviving spouse were to remarry.

Conditional Trust

A conditional trust, which is also sometimes referred to as an incentive trust, is a type of trust where certain requirements must be met by the beneficiaries before they can receive their share of the assets. The trustee is responsible for managing the trust’s assets until these conditions are fulfilled.

Often, conditional trusts are used to encourage beneficiaries to achieve certain goals or reach particular milestones in their lives. These conditions can be related to education, such as completing a university degree, or to personal achievements, like getting married or starting a family.

As the person creating the trust, you have the flexibility to decide what these conditions will be, based on what you think is important. For example, you might set a condition that beneficiaries need to reach a certain level of education or prove they can manage money responsibly before they can inherit. The conditions can be as simple or as detailed as you wish, giving you a way to influence the future actions and choices of your beneficiaries.

For instance, someone creating a trust might specify that beneficiaries are required to reside in the same state as their surviving parent in order to receive their inheritance. This could be done to encourage family closeness or to maintain family connections.

Both life interest trusts and conditional trusts offer distinct advantages for estate planning. They allow individuals to ensure their assets are managed and distributed according to their specific wishes and any conditions they want to set. These types of trusts provide a structured method for protecting and guiding the transfer of wealth across generations, in line with the personal and family objectives of the person establishing the trust.

Advantages of Fixed Unit Trusts for International Estate Planning

Fixed unit trusts are a very useful tool when it comes to estate planning that involves different countries. They offer significant advantages, particularly in helping to prevent disagreements, providing tax benefits, and strengthening the protection of your assets. Let’s explore these advantages in more detail:

Clear Terms and Fewer Disputes

Because fixed unit trusts clearly define the entitlements of beneficiaries in advance, they can help to minimize potential disputes. This is especially helpful when trusts involve individuals who are not related to each other, as it makes sure everyone understands exactly what their share of the trust’s income and assets will be.

Tax Benefits

Fixed unit trusts come with several important tax advantages:

• Reduced Capital Gains Tax: Beneficiaries may be eligible for a discount on Capital Gains Tax when trust assets that have been held for over a year are sold.
• Franking Credits: Trusts have the ability to pass on franking credits from dividends to those who hold units, which can lower the overall tax amount payable.
• Effective Tax Management: These trusts allow for strategies to manage tax liabilities and make claiming deductions more effective.
• Using Past Losses for Future Gains: Trusts can carry forward any tax losses from previous periods to reduce tax on profits made in the future, provided the trust meets the requirements to be classified as a fixed trust.

Protection of Assets and Management of Income

• Using Bare Trust Arrangements: Trustees have the option to hold distributions under what’s known as a bare trust arrangement. This can protect assets until beneficiaries, such as children, are old enough to manage them responsibly. This adds an extra layer of security for trust funds that are meant for beneficiaries who are not yet adults and legally able to handle finances.
• Superannuation Contributions for Unit Holders: The trust can make contributions to superannuation (retirement savings) funds for unit holders. This is a tax-efficient way to handle income distributions because these contributions are generally taxed at a lower rate.

Land Tax Advantages

Fixed unit trusts are officially recognized under the Land Tax Management Act 1956 (NSW). This recognition means that beneficiaries are considered to have a form of ownership right in any land held by the trust. Because of this classification, they can access land tax exemptions and other benefits that are typically available to those who directly own property.

Disadvantages of Fixed Unit Trusts for International Estate Planning

While fixed unit trusts have many advantages, it’s important to be aware of their downsides, especially when considering estate planning across different countries. Here are some of the main challenges associated with using fixed unit trusts:

Limited Protection for Your Assets

Fixed unit trusts do not offer the same level of protection for your assets as discretionary trusts. If a unit holder faces bankruptcy, the units they own in a fixed unit trust are considered assets. This means they could be sold to pay off debts to creditors. For individuals who are looking to protect their assets from potential claims, this can be a significant disadvantage.

Complexities in Tax-Free Distributions

Another drawback is that it can be complicated to make distributions from a fixed unit trust without triggering the tax. Unlike discretionary trusts, fixed unit trusts have less flexibility in how they manage the distribution of income and capital gains. For example, while unit holders can benefit from the 50% discount on Capital Gains Tax, other tax reductions, like the 50% active asset reduction for small businesses, may still lead to a taxable event.

Reduced Flexibility in Distributing Income

A key characteristic of fixed unit trusts is their inflexibility when it comes to distributing income and assets. What each unit holder is entitled to receive is strictly determined by the number of units they possess. There is no option to change these distributions based on individual needs or circumstances. This rigid structure is different from discretionary trusts, where trustees have the ability to distribute income and assets as they see fit. This flexibility in discretionary trusts can be useful for optimizing tax outcomes for beneficiaries.

No Loss Distribution to Beneficiaries

Fixed unit trusts are not able to pass on any capital losses or revenue losses they incur to the beneficiaries. If the trust experiences losses, these losses must be carried forward and used to reduce profits in future years. This can be inefficient, especially if strategies like negative gearing are being used. In such cases, beneficiaries might need to hold debts personally, rather than having the trust hold them, to avoid trapping losses within the trust structure.

Income Must Be Distributed Annually

Fixed unit trusts are required to distribute all income they generate to unit holders each year. This mandatory distribution can limit the trust’s capacity to keep earnings within the trust for reinvestment or other strategic purposes. This can potentially impact the trust’s ability to grow and be adaptable over time.

How Fixed Trusts Function

Fixed trusts, including fixed unit trusts, operate using a defined system that involves different roles and a clear process for distributing income. Let’s look at the key aspects of how they work:

Trustee’s Role

The trustee is in charge of handling the trust’s resources, which could be made up of different kinds of investments like company shares, government bonds, property holdings, or various monetary assets. The trustee’s roles involve sticking to what’s written in the trust document, keeping the trust financially stable, and making certain that the resources are handled in a way that most benefits those who should receive from the trust.

Beneficiaries’ Role

The beneficiaries in a fixed unit trust are known as unit holders. They are essentially investors who have purchased units in the trust. Based on the number of units they hold, these unit holders are entitled to a proportional share of the trust’s income and assets. It’s important to note that unlike discretionary trusts, in a fixed trust, the way income and assets are distributed is strictly set and cannot be changed by the trustee’s decision.

Distribution of Income

The income that the trust generates from its investments – for example, dividends from shares, interest from bonds, or rent from properties – is paid out to the unit holders. This payout is done according to how many units each person holds. These distributions happen at set times, such as every three months or once a year. The trust deed usually specifies when and how these payments will be made.

Ease of Access to Funds

One of the main advantages of unit trusts is that they offer liquidity. This means that units can often be bought and sold relatively easily on the market. This allows investors to join or leave the trust with more flexibility. This ability to easily access their investment is a significant benefit for those looking for adaptable investment options.

Example: The Unit Trust of Samoa (UTOS)

A real-world example of a fixed unit trust is the Unit Trust of Samoa (UTOS). It was created to give people in Samoa opportunities to invest. Approved by Samoa’s Minister of Finance, it has been operating since 2010 and allows individuals, families, and organizations to invest in a professionally managed collection of assets.

UTOS – Structure and Operation:

• Who Can Invest: To be a unit holder, you must be of Samoan descent or a permanent resident. Each unit holder must invest in at least 25 units.
• Investment Management: The money pooled from all the unit holders is invested by the UTOS Manager. This Manager makes decisions about how to invest the money but is overseen by a Trustee.
• Trustee’s Job: The Trustee is the legal owner of the trust’s assets. They make sure that the Manager’s investment decisions are in line with the trust’s goals and any relevant regulations. It is important to note that unit holders cannot tell the Trustee how to manage the trust’s assets in a specific way. This is to ensure the trust is managed professionally and impartially.

This structure ensures that all unit holders receive benefits in proportion to their investment from the trust’s investment activities. At the same time, professional managers handle the complexities of making investment choices.

Fixed trusts like UTOS are designed to offer investors a secure and organized way to invest. They provide clear advantages in terms of how income is paid out, how assets are managed, and the ease with which investors can access their funds. The way the trust is set up ensures that assets are managed carefully, with the best interests of the unit holders being the main focus.

Fixed Unit Trusts vs Discretionary Trusts

Aspect	Fixed Unit Trusts	Discretionary Trusts
Ownership and Authority	Those who hold units have a set form of ownership, similar to company shareholders. The trustee acts based on what the unit holders direct.	Beneficiaries do not have ownership rights. The trustee has complete authority over how the trust’s income and assets are distributed.
How Income and Assets Are Distributed	Income and assets are distributed according to the set percentages owned by unit holders, as detailed in the trust’s rules.	The trustee decides how to share out income and assets among the beneficiaries, allowing for adaptability.
Adaptability and Safeguarding of Assets	Less adaptable, and asset protection is more challenging because ownership is predetermined by the unit trust document.	More adaptable and provides stronger asset protection because the trustee controls how distributions are made.
Capital gains are taxed within the trust itself. Unit holders are given credit for the tax that the trust has already paid.	Unit trusts are taxed at the standard company tax rate. Unit holders then receive their share of the income after tax has been paid by the trust.	Discretionary trusts pass income to beneficiaries, who are then taxed at their own personal income tax rates, which can be more beneficial from a tax perspective.
Capital Gains Tax (CGT)	Capital gains are taxed within the trust itself. Unit holders are given credit for the tax that the trust has already paid.	Capital gains can be distributed to beneficiaries who are in lower tax brackets, which can potentially lower the total amount of tax paid.
Typical Business Uses	Often used for combined investments or business projects where clear ownership and openness are important.	Less often used for public investments because entitlements are not fixed. They are better suited as trusts for families or for managing personal assets.
Suitability for Asset Protection	Offers limited protection for assets; assets are more vulnerable if creditors make claims.	Offers considerable asset protection because beneficiaries do not have a guaranteed right to assets, making them harder for creditors to access.
Relevance to Estate Planning	Provides predictable outcomes for estate planning because entitlements are predetermined.	Useful for passing wealth down through generations in a tax-efficient way. The trustee can adjust distributions to minimize tax liabilities.

The Process of Setting Up a Fixed Unit Trust:

Creating a fixed unit trust involves several important steps. These include the initial subscription of units, setting up the trust’s bank account, managing the trust’s investments, and taking into account tax registration requirements. Below is a detailed explanation to help you understand what is involved in setting up a fixed unit trust:

Process of Subscription

Most fixed unit trusts are created through a subscription method. In this method, the first unit holders, known as subscribers, purchase units in the trust. This is similar to how individuals buy shares when a company is first established. These subscribers pay a specific price for each unit to the trustee. The trustee then issues the corresponding number of units to the subscribers.

Units in a trust can be partly paid, where the full amount isn’t paid upfront, or fully paid. They can also be divided into different categories, each with different entitlements, such as different voting rights or rights to income or assets. However, for a standard fixed unit trust, like those designed to meet requirements for land tax in certain regions, it’s typical to issue only one class of unit. These units are usually fully paid for and come with equal rights for all holders.

Creating a Bank Account for the Trust

After the trust deed has been officially signed, the next step for the trustee is to open a bank account specifically for the trust. This bank account is essential for handling all of the trust’s financial activities.

• How to Name the Bank Account: It’s important to name the account in a way that clearly shows it belongs to the trust. For example, an appropriate name would be something like “ZBC Pty Ltd as Trustee for the FGH Unit Trust.”
• Steps to Open the Account: The bank will ask for specific documents to open the account. If a corporate trustee has just been created, the company that helped set it up may provide a set of documents to assist with opening the bank account.
• Tax Compliance: It’s vital that the trust’s bank account is used only for transactions related to the trust. This is important for keeping the trust’s finances clear and for complying with tax rules.

Managing the Trust’s Investments

Trustees are generally given broad powers to make decisions about investments, as detailed in the trust deed. However, they are expected to be careful and responsible when making these investment decisions. The standard of care is similar to what would be expected of a sensible person managing their own investments.

The trustee must make sure that investments are made with proper care and consideration. They should use their skills and knowledge to act in the best financial interests of the beneficiaries.

Tax Registration Considerations

Depending on what the trust does and how it’s structured, it may need to register for different types of tax. This could include registering for Goods and Services Tax (GST), Pay As You Go (PAYG) withholding for employees, and other tax obligations. It’s recommended to get advice from an accounting professional to ensure that all necessary tax registrations are completed and that the trust is following all relevant tax laws.

By completing these steps, you can set up a fixed unit trust that meets all legal requirements.

Conclusion

Fixed unit trusts offer a well-defined and organized way to manage assets. This makes them a strong option for individuals who are looking for estate planning solutions that are both predictable and reliable. While they come with several advantages, such as tax benefits and the potential to lessen disagreements among beneficiaries, it’s also important to consider their limitations. These include being less adaptable and offering less asset protection when compared to some other types of trusts. If you are thinking about setting up a fixed-unit trust as part of your international estate plan, we recommend seeking assistance from Samoa Offshore Legal. For detailed advice on whether a fixed unit trust is right for you, and to explore your estate planning options, please get in touch with legal professionals.