Hybrid Trust Setup: Combining Flexibility with Control
A hybrid trust setup combines the features of a unit trust with those of a discretionary trust. Since the underlying structure is a unit trust, most distributions follow members’ fixed unit holdings. However, a discretionary payment—a unique feature—is available in exceptional circumstances.
This makes a hybrid trust the best of both worlds, especially in business arrangements involving non‑related members. It solves a key issue: how to pay non‑fixed entitlements without forcing equal distributions to all unitholders.
Real‑Life Example: Why a Standard Unit Trust Falls Short
Imagine one unitholder needs a lump sum payment of $100,000 from the sale of a business interest. In a fixed unit trust with four equal unitholders, each is entitled to 25% of any distribution.
That means the 25,000 to each unitholder**—not $100,000 to the intended recipient.
- Each of the four unitholders is taxed on their $25,000 share.
- The three unintended recipients must then transfer $75,000 back to the original beneficiary via a separate arrangement.
A Discretionary Trust Alternative (Flawed)
You could place the business in a discretionary trust, with a unit trust as one primary beneficiary. But if the discretionary trust owns all units, control shifts entirely to the discretionary trustee. All payments become discretionary, which may be inadvisable if you need fixed entitlements. In many cases, the underlying trust should remain a unit trust, not a discretionary trust.
How a Hybrid Trust Solves the Problem
In a hybrid trust setup, the underlying structure is a unit trust with limited discretionary powers assigned to the trustee.
Using the same example—a $100,000 payment to only one unitholder:
- The trustee elects to make a discretionary payment to that single unitholder rather than $25,000 to each of the four.
- That unitholder receives any CGT benefits from the sale of the business interest and pays tax only on their own share of the gain.
Key Advantages of This Structure
- No need for two separate trusts(reduces complexity and cost).
- Compliance costs are lowerbecause only the intended unitholder is taxed.
- The unitholder entitled to the lump sum is taxed fairly—without forcing unintended distributions.
Addressing the Trustee’s Discretionary Powers
Some unitholders may not like that the trustee has discretionary powers—especially when there are multiple unitholders but only one trustee.
Solution:
Source your hybrid trust deed from a lawyer who includes a clause limiting discretionary payments without the unanimous consent of all unitholders. This protects all parties while preserving flexibility.
Features & Benefits of a Hybrid Trust
- Income without ownership change – Beneficiaries can receive benefits or income without altering investment ownership.
- Confidentiality – No statutory disclosure requirements keep the trust’s structure private.
- No audit required – Reduces ongoing compliance burden.
- Easy entry and exit – Sale or transfer of units is straightforward.
- Limited liability – Achieved by using a corporate trustee.
- Tax planning flexibility – More options for distributing income and capital gains.
- Beneficiary‑level taxation – Beneficiaries are taxed on the income and capital gains they actually receive.
- Standard winding‑up process – Same as other trust types.
Disadvantages to Consider
- Higher setup and admin costs – More expensive than individual, partnership, company, or discretionary trust structures.
- Legislative risk – Trusts are always susceptible to changes in tax law.
- Trapped losses – Capital or income losses (including negative gearing) stay within the trust, offset against future gains—not distributed to unitholders.
- Franking credit loss – Refundable franking credits are lost when grossed‑up profits are less than net losses from other sources. Carry‑forward losses are reduced by the amount of lost franking credits.
Steps to Create a Hybrid Trust
While full setup requires professional advice, the general process includes:
- Drafting a compliant hybrid trust deed(including unanimous consent clause for discretionary payments).
- Appointing a trustee(individual or corporate).
- Issuing unitsto initial unitholders.
- Registering for an ABN/TFNif trading.
- Documenting discretionary payment rulesin the deed.
Need Help Setting Up a Hybrid Trust?
Contact A One Accountants to arrange a meeting with one of our experienced accountants. We’ll explain the process, help you choose the right structure, and prepare the necessary documents.