A Discretionary trust is a trust that enables flexibility in the distribution of the profit for that year. For example, if the trust ran at a profit of $10,000 for the financial year, the trustee may elect to give Mr Smith $6,000 and Mrs Smith $4,000. The next year, the trust also operates a profit of $10,000 however for this year, the trustee elects to give Mr Smith $1,000, Mrs Smith receives $3,000 and their son $6,000.
In essence, the profit is distributed at the discretion of the trustee, hence the name discretionary trust.
Most lenders accept discretionary trusts as they are one of the most common trusts set up currently.
A Unit Trust is different from a discretionary trust as the distribution of profit is fixed. When the trust is set up, there are units established within the trust deed, the number of units can range from 1 to 1,000 and beyond. The profit is distributed at a rate per unit and each unit holder receives their share in accordance with however many units they own. For example: If we set up ABC Unit trust with 10 units, Mr Smith owns 4 and Mrs Smith owns 6. That means that providing no additional units are issued or sold, Mr Smith would always receive 40% of the profit from the trust and Mrs Smith would always receive 60%. If we take our earlier example of $10,000 profit, Mr Smith would receive $4,000 and Mrs Smith would receive $6,000.
Unit trusts are a common form of trust and as a result, most lenders will accept this format.
A Hybrid Trust is a combination of both a unit trust and a discretionary trust. Each beneficiary owns units and is entitled to fixed distribution.
These types of trusts are not as common as Unit and discretionary trusts and therefore receive a greater deal of scrutiny and are not widely accepted in the lending community. There are banks who will lend to hybrid trusts but the choice of lenders is much more limited that discretionary and unit trusts.
More commonly known as SMSF’s, these trusts are set up to manage your superannuation. Refer to our SMSF loans page for further details.
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