How to Set Up a Unit Trust

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A unit trust is a lot like a closed-end mutual fund. It is an investment company organized as a trust, the trustee of which arranges for the purchase for a fixed portfolio of stocks or bonds. Shares of the trust, called units, are then sold to investors (who become unitholders) during a one time public offering. Though the trustee handles the day to day activities of the trust, the investment portfolio itself is not actively managed. Instead the trust has a predetermined expiration date, at which time the assets are sold and the proceeds distributed amongst the unitholders.

The Steps

Designate settlor and trustee(s). The settlor is the creator of the trust and, in a unit trust, cannot be a beneficiary. The trustee is usually a professional money manager. A proper trust must have beneficiaries. In a unit trust, these are the unitholders.

Draft and execute trust instrument. The trust deed that creates the unit trust must identify the parties in Step 1, describe the nature and subject matter of the trust, and establish the rules for its management. The trust instrument should include the expiration date of the trust and provisions for early termination, sale by unitholders, and other contingencies.

Draft prospectus. The prospectus is a public document that discloses the strategy and risks of the trust's portfolio. Drafting it is usually undertaken by the trustee or their agent. The document should describe the fees, contract values, tax considerations and other important information needed by investors and potential unitholders in accordance with section 8 of the Investment Company Act of 1940.

Register with SEC. The appropriate registration form to file with the SEC depends on the nature of the unit trust. Use Form N-8B-2 for a new registration with a concurrent issuance of securities. Separate accounts organized as a single unit investment trust should register with Form N-4. Use Form N-6 for insurance company separate accounts registered as unit investment trusts that offer variable life insurance policies.

Tips & Warnings

  • Though unit trusts often do not trade on the major exchanges, ETFs organized as unit trusts can. Units of other trusts usually trade on secondary exchanges, or through the trustee of the trust, who can buyback units and resell them if so empowered in the trust instrument.
  • Setting up a unit trust is typically the work of professional securities lawyers. If you think you want to set up a unit trust, it's highly recommended you get legal consultation.

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