What is the (Trust) fund? Why are there so few investors who understand it?

If you are an investor and have heard the words “trust” or “trust fund” before but still confused about what it is, how it differs from REIT, and want to understand more about REITs or mutual funds you know… the answer is right here. This article will help you understand trust funds and how to invest in these assets.

What is a trust? Looking from another perspective

Instead of defining it abstractly, let’s understand that a trust is a legal mechanism for transferring and managing assets for others. This system involves several parties:

• The transferor of assets (Settlor) is the owner of the assets who wants someone else to manage them, like a rice merchant.
• The manager (Trustee) is the actual person or entity that manages the assets without having ownership rights.
• The beneficiaries (Beneficiary) are the parties who ultimately receive the benefits.

Why create a trust fund?

This system has existed since ancient Rome but became more prominent during the Middle Ages in England. Nobles going to war would entrust land to trusted individuals to manage, so that benefits would flow to their families. This idea took root and became an official system:

###Main benefits of establishing a trust fund

1. Generate returns without transferring large amounts of assets - Trusts allow the distribution of benefits from assets to third parties without having to allocate all the income directly. This was often used for inheritance purposes.

2. Manage according to the owner’s intent - Asset owners can specify how the assets should be managed after their passing. The trustee must follow this as per the agreement, known as “certainty of intent.”

3. Tax advantages - Depending on the laws of each country, establishing a trust can provide tax benefits.

4. More flexible than other management tools - Unlike funds that require registration and approval, a trust is merely a contract between parties, making it easier to modify.

5. Assistance when the owner cannot manage assets - If the owner is ill or unable to manage, the trust can continue to operate. When they recover, they can revoke the trust and reclaim the assets.

Types of trusts

Once you understand the basics, you should know there are many types:

Based on revocability:

• Revocable Trust (Revocable Trust) - The owner can cancel or modify it.
• Irrevocable Trust (Irrevocable Trust) - Once signed, it cannot be undone.

Based on purpose:

• Asset protection trusts (Asset Protection)
• Charitable trusts (Charitable Trust)
• Land or real estate trusts (Land or Real Estate Trust)
• Generation-skipping trusts (Generation-Skipping Trust)
• Grantor retained annuity trusts (Grantor Retained Annuity Trust)
• Special needs trusts (Special Needs Trust)

Conditions that a trust fund must have

To be legally valid, a trust fund must have three elements:

1. Clear intent - The contract must clearly state what the owner and trustee intend to do.

2. Actual and verifiable assets - It must be known what assets exist and that they can generate benefits.

3. Actual beneficiaries - There must be real persons or entities who can receive the benefits, not someone who has disappeared or passed away.

Trust vs REIT vs mutual fund - What’s the difference?

1. Trust vs REIT

REIT (Real Estate Investment Trust) is actually a type of trust, but created solely to manage real estate. So, it’s like a sibling category.

Both REITs and trusts share similarities:

• Neither has a legal corporate status.
• Both are established from the same trust agreement.

The difference is:

• Trusts are more flexible and can manage various assets (stocks, bonds, businesses, etc.)
• REITs are limited to real estate, with stricter structures and regulations.

2. Trust vs Mutual Fund (Mutual Fund)

The differences become clearer:

Mutual Funds:

• Have legal entity status (a legal person)
• Their nature is pooling money from many investors to invest according to the fund’s objectives.
• Managed through units, with dividends paid back to unit holders.

Trusts:

• Do not have legal entity status; they operate through contracts.
• More flexible in management.
• Ownership and transfer are governed by contracts, not units.

Trust funds in Thailand - What options are available?

In Thailand, the Securities and Exchange Commission authorizes the establishment of trust funds, but only for raising capital in the stock market.

There are 2 types:

Type 1: Active Trusts (Active Trust)

• Established to generate higher returns.
• For example, trust funds for institutional investors and high-net-worth individuals (II/HNW Trust Fund)
• Or REITs focusing on real estate investments.

Type 2: Passive Trusts (Passive Trust)

• Established to hold existing assets.
• Examples include ESOPs (for employees) or EJIPs (Employer-Employee Investment Projects)
• Or sinking funds for debt repayment (Sinking Fund)

Thus, REIT is a subset of trusts, but calling all trusts REITs is not accurate because trusts are broader and tied to real estate.

Most trust funds permitted in Thailand are REITs, which limits investors to this type. However, the advantage is that real estate assets are easy to verify, making it accessible even for novice investors.

Understanding trust funds should be part of your foundational knowledge

In summary, trusts are not overly complicated. They are simply legal tools for asset management.

Since last month, they have been primarily used for estate management, but now they can be applied to various assets.

When a trust fund’s members are real estate, we call it a REIT, which manages benefits and distributes dividends to unit holders.

This makes it a good option for those who want to invest in large assets but lack enough capital to buy on their own.