Discretionary trust vs unit trust: what lenders accept

No beneficiary has a fixed entitlement; the trustee decides distributions each year. Lenders assess the trust's income and the guarantors' income, with guarantees from the trustee's directors and the beneficiaries whose income is relied on. The flexibility that makes the trust useful for tax makes lenders want the individuals on the hook, because the trust could distribute its income elsewhere.

Each unit holder owns a fixed share and is entitled to that share of income and capital. Lenders assess each unit holder's capacity for their share of the loan, and because the loan is to the trustee for the whole amount, they require joint and several guarantees from all unit holders, meaning each is liable for the lot. Unit holders can themselves be discretionary trusts or SMSFs, which is common in property syndicates, and the lender will then look through those too. The file grows with each unit holder.

Hybrid trusts combine units and discretionary powers and were marketed for negative gearing inside a trust. Many lenders decline them or treat them as discretionary, and the tax treatment has been challenged. They are rarely recommended now and are worth avoiding for finance purposes.

A family buying investment property: discretionary trust, or personal names if negative gearing matters. Two or more unrelated investors: unit trust, with a unit holders' agreement covering what happens if one wants out, because the lender's guarantee is joint and several and one party's problems become everyone's. An SMSF investing with others: a unit trust that satisfies the superannuation rules, structured by an adviser before the lender sees it.