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Differentiating risk impacts for unit trusts in unitholder agreements

Differentiating risk impacts for unit trusts in unitholder agreements
By Tony Zhang
15 June 2021 — 2 minute read

With unit trusts always posing potential risks to SMSFs, parties can consider setting up unitholder agreements to minimise future uncertainty, but there are numerous traps to steer clear of before entering into the arrangement, according to a law firm.

A unitholders’ agreement is generally recommended where there is more than one unitholder in the same unit trust, even if the other unitholder is a related party. 

This type of agreement confirms the terms and conditions of the relationship between unitholders and covers matters that are not adequately or appropriately addressed in the unit trust deed, especially to minimise any future uncertainty, dispute or friction should there be a difference of opinion between the parties on how the unit trust operates, according to DBA Lawyers. 

In a recent DBA Lawyers podcast, lawyer Shaun Backhaus said a unitholders’ agreement can be really good to properly set out a lot of the terms and the agreements between the different unitholders that are investing in the trust.

“A lot of these things might be covered in the unit trust deed, so it might not be as important as where, for example, you’ve got people investing in property directly and you might need a tenants-in-common agreement there,” he said.

“Certainly, for unit trusts, you will still have the trust deed, but there’s a lot of other things that you can consider putting in where you might want to deal with in the future.”

Mr Backhaus noted it is important to be aware that when there’s a lot of people investing in trust, a lot of things can go wrong.

“Unitholders can die, lose capacity, go bankrupt or just want to leave the structure, and during something like a property development, that might be difficult,” he said.

“A lot of SMSFs may find themselves in scenarios where someone will either leave the unit trust or when others want to force them out.

“A key part of that is defining when a default occurs, so you want to think about what things you would not want a unitholder to be able to do in relation to their interest.

“Whether they’re giving security over their units, becoming bankrupt, contravening super laws or dying and losing capacity, those are all scenarios where you might want a unitholder to be forced to sell their units.”

As a result, one of the key things in these agreements to consider is when a sale will occur and the process by which that sale will occur, according to Mr Backhaus.

“Think about how those units will be valued. If someone wants to leave, do they have to offer those units to other unitholders first, and think about how that process will work,” he said.

“Valuing units and valuing assets of the unit trust is always really important, but it is where complexities usually arise and that’s where a lot of arguments can crop up.

“SMSFs may want to deal with the day-to-day management of a property if there’s going to be property held long-term in a unit trust and also consider how bank accounts and costs will be managed.

“Unit trusts can also be prudent to consider dispute resolution and mediation, as issues will crop up from time to time. Having a well-organised and well-known path to mediate and resolve those disputes is often a really good way to make sure the structure can keep going.”

Differentiating risk impacts for unit trusts in unitholder agreements
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Tony Zhang

Tony Zhang

Tony Zhang is a journalist at Accountants Daily, which is the leading source of news, strategy and educational content for professionals working in the accounting sector.

Since joining the Momentum Media team in 2020, Tony has written for a range of its publications including Lawyers Weekly, Adviser Innovation, ifa and SMSF Adviser. He has been full-time on Accountants Daily since September 2021.

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