What is a unit trust?

Unit trusts are created with both wealth management and estate planning in mind. A unit trust is not actually a “trust” at all, but rather a form of mutual fund. A unit trust differs from a regular trust in that it's completely unmanaged and not handled by attorneys, but are sold by brokers.

Investing in a Unit Trust

There is technically no trustee in a unit trust and the beneficiaries are referred to as shareholders. Two other terms used to describe this investment arragement are: a regulated investment company and a grantor trust. In other words, the only beneficiaries allowed on the trust are those who are paying into it. Even more than that, these beneficiaries have voting rights as to whether to keep the trust going. The unit trust packages created by investment banks are then offered as package deals to brokerage firms. Similar to other investment businesses, a unit trust requires a document known as a Trust Indenture to become official. Without this document, the IRS will not recognize the unit trust.

Most people who invest in unit trusts are looking for a means of shelter from unrealized capital gains in their investments. The trick for offering this shelter is that the “trust’s” value is determined by the entry investment amount, not the final net worth of the account. Additionally, unit trusts never gain investment income because all income is paid annually as dividends to the beneficiaries.

Roles of a Unit Trust

The structure of a unit trust is much more complex than a traditional trust and includes five different roles. The fund manager is similar to a trustee in that they actively run the trust and ensure all proper taxes and dividends are paid. The trustees of this trust keep a close eye on the fund manager and verify that the fund manager is working consistently with the investment objectives of the unit trust found in the original Trust Indenture document. The unitholders are those who have have direct access to trust funds at their discretion. The distributors oversee the unitholders and verify that they are working correctly with the fund manager. Finally, the registrars work as a middleman between the fund manager and the stakeholders.

Unit trusts are open-ended, allowing various types of funds to be invested. For instance, a unit trust may contain deeds, cash, cash equivalents, and real property. All of these are placed into the unit trust and can be used by the fund manager to further the trust’s income and create higher dividends. The primary goal of a unit trust is simply to obtain a sizable dividend from your investment.

Getting Legal Help

If a unit trust sounds like a useful wealth management option for your portfolio, contact a wealth management specialist for a consultation.