Income trusts contain income-producing assets for investors, but there are a few different types to consider. Here’s what you need to know about income trusts and how they work.
Understanding Income Confidence
Income trusts contain assets that produce income and can be structured as personal trusts or publicly traded trusts that issue shares, such as real estate investment trusts (REITs).
Personal trusts can be used in estate planning where a trust fund is established to make distributions to beneficiaries. Listed trusts are required to distribute the vast majority of their income to shareholders.
Personal versus publicly traded income trusts
Personal income trusts are often used in estate planning or managing family assets. A trustor may set up a trust, which is managed by a trustee, as a way to control distributions to the trust’s beneficiaries. There may also be controls on how the trust is invested.
Publicly traded income trusts manage a portfolio of income-producing assets and distribute that income to shareholders. For example, a REIT may own several apartment complexes that generate rental income and then distribute those payments to the trust’s shareholders. REITs are required to distribute 90 percent of their taxable income to shareholders.
Types of Income Trusts
- Investment funds
- Investment trusts pool money from multiple investors to invest in securities such as stocks and bonds. They are commonly known as mutual funds and are managed by fund managers who make decisions on behalf of the shareholder.
- REITs
- Real estate investment trusts own various types of physical properties, such as apartments, office buildings or even cell towers. The assets generate income that is then distributed to shareholders.
- Royalty trusts
- Royalty income trusts allow investors to generate income from energy assets, such as oil or natural gas. Once the energy capacity is depleted, trust is dissolved.
- Business trusts
- A business trust is used to hold an interest or interest in a particular business. Personal trusts often have a diversified portfolio of assets, but a business trust may have an interest in one company. A business trust can have one or more beneficiaries.
Benefits of Income Trusts
- Trusts are not taxed directly, but individuals are taxed on the income they receive from the trust. It avoids the problem of double taxation, which can occur when companies pay taxes on profits and then pay dividends to shareholders who are also taxed.
- Investors looking for income can easily invest in a portfolio of income-producing assets such as REITs.
- Income-producing assets held within a trust can be less risky than other assets.
Considerations and Risks of Income Trusts
- Income from trusts is not guaranteed. The portfolio is only as strong as the underlying assets it holds, so the money in a trust can dry up if not invested wisely.
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Rising interest rates could hurt the prices of listed trusts as investors looking for income can find attractive returns elsewhere.
- Trusts can be complex for novice investors to understand.
In short
Income trusts contain income-producing assets that distribute funds to beneficiaries and shareholders. They can come in various forms, but are often used in estate planning for wealthy families and can be publicly traded in the form of REITs.
Financial advisors may be able to help you set up a personal trust or identify REITs in which to invest. Bankrate’s financial advisor matching tool can help you find a financial advisor near you.
