A hybrid trust setup combines the features of a unit trust with those of a discretionary trust. Since the underlying trust is a unit trust, any distributions will be issued in accordance with the members’ fixed unit holdings. A discretionary payment is a unique type of payment that is only used in exceptional circumstances. A hybrid trust combines the best of both worlds. Within a business arrangement, where non-related members are involved, a hybrid trust setup can solve a major issue where non-fixed entitlements need to be paid.
For example: One of the unitholders of a hybrid trust, needs to be paid a lumpsum payment of $100,000 from a sale of business interest. In a fixed unit trust with equally distributed units between 4 unit holders; each of the unit holders will be entitled to 25% of the share of $100,000.
This means, instead of paying $100,000 to the one beneficiary, the payment will be made as a distribution of $25,000 to each unit holder. In this situation, the payment will be taxed in the hands of each of the 4 unit-holders rather than one of them who was originally entitled to the full payment of $100,000.
The remaining 3 unitholders in the above example will then have to transfer the $75,000 owed to the individual who was supposed to receive $100,000 originally in a separate arrangement. The other way around this is to have the business in a discretionary trust and one of the primary beneficiary being the unit trust.
However, if all units are owned by the discretionary trust, the underlying trust that controls the business interest then falls under the discretionary trust, which may not be advisable since all of the control is in the hands of the trustee of the discretionary trust. All payments are based on the trustee’s discretion thereafter, hence the underlying trust should be a unit trust rather than a discretionary trust.
Now, let us consider the above example where a hybrid trust is used instead.
In a hybrid trust setup, the underlying trust is a unit trust with limited discretionary powers assigned to the trustee. Now, from the above example, where the $100,000 needs to be paid to only one unit holder, the trustee would elect to make a discretionary payment to one unit holder instead of $25,000 each to the 4 unit holders. The unit holder will be entitled to receive CGT benefits if any from the sale of the business interest and will pay their fair share of tax.
The hybrid trust setup not only solves the issue of forming two separate trusts but also reduces the cost of compliance by taxing the unitholder who was entitled to the lumpsum payment.
In a hybrid trust setup, some unitholders may not like the fact that the trustee has discretionary powers, particularly so where there are more than one unit holders but only one trustee. To address this concern, you should source your hybrid trust deed from a lawyer that has a clause to limit discretionary payments without the unanimous consent of all unitholders.
Some features and benefits of Hybrid Trust setups:
- Beneficiaries can get benefits or income without changing ownership of the investments.
- Because there are no statutory disclosure requirements, the workings and structure of the trust can be kept confidential.
- There are no audit requirements.
- Easier to enter and exit with the sale/transfer of units.
- Limited liability can be achieved with the use of a corporate trustee
- Gives you more options when it comes to tax planning.
- Beneficiaries are taxed on the income the receive and capital gains.
- The process of winding up is same as that of the other trusts.
- The cost of establishing and administering this trust is higher than that of an individual, partnership or company or a discretionary trust or a family trust.
- A trust setup is always susceptible to change in legislation.
- Any capital or income related losses and negative gearing shall be trapped within the trust and offset against future gains without being distributed to the unit holders.
- The refundable franking credit is lost when grossed up profits are less than net losses from other sources, and the carry forward losses are reduced by the amount of franking credit lost.
When does the trust vest?
Unless the unit holders decide on a shorter or longer time, the Trust will end in 80 years from the Start Date. The ‘law against perpetuities,’ as it is known in equity, states that it is impossible to put up a trust that will last eternally. This reflects a policy intention for property to vest in someone who is capable of dealing with it completely at some point in the future.’
Steps to Create a Hybrid Trust?
Kindly contact our office if you wish to form a hybrid trust. We shall setup a meeting with one of our accountants who shall explain the process to you.