Understanding Trust Fund: An investment tool that is more flexible than REITs

For investors interested in asset management through legal mechanisms, the term Trust Fund may sound like an elegant method but still remains a somewhat vague concept, especially when distinguishing it from REITs or mutual funds. In fact, a Trust is a legal structure that allows one party to manage assets for the benefit of others. This project is highly flexible and can be applied to various types of assets.

Key Differences: Trust vs REIT vs Mutual Funds

Understanding the differences among these asset management formats is an essential first step for prudent investing.

Trust when it is a REIT: A REIT (Real Estate Investment Trust) is actually a special type of Trust with a limited purpose of managing real estate. In other words, all REITs are Trusts, but not all Trusts are REITs because Trusts can manage assets beyond real estate.

Trust compared to mutual funds: Mutual Funds (Fund) are distinctly different from Trusts in that funds have legal entity status, whereas Trusts do not. Additionally, funds are established through formal registration and approval processes, while Trusts are contractual agreements among involved parties, offering greater flexibility.

What is a Trust Fund: Structure and Details

At its core, a Trust Fund involves transferring assets to a trusted manager (Trustee) who will manage and generate returns according to the owner’s wishes (Settlor) so that the beneficiaries (Beneficiary) can receive benefits.

Assets within a Trust Fund can be diverse, ranging from cash, real estate, stocks, bonds, businesses, artworks, to liabilities, making Trust Funds highly versatile tools.

Three Parties Involved

Establishing a Trust Fund requires three roles:

• Settlor (Settlor): The original asset owner who assigns management to the Trust, retaining ownership but losing immediate rights to use the assets.
• Trustee (Trustee): The manager who handles the assets according to the contractual terms. They may charge management fees but do not have a stake in the returns.
• Beneficiary (Beneficiary): The ultimate recipient who has the right to claim damages and track assets if the Trust is mismanaged.

Essential Elements for Setting Up a Trust

A fully established Trust must have three elements:

1. Clarity of Intent (Certainty of Word) - The establishment contract must be explicitly stated.
2. Clarity of Assets (Certainty of Subject Matter) - Assets must be precisely identified with clear management.
3. Clarity of Beneficiaries (Certainty of Object) - Beneficiaries must be real persons and not deceased individuals.

Types of Trust Funds: Classified by Purpose and Nature

Trust Funds are divided into various types, from revocable Trusts (Revocable Trust) to irrevocable Trusts (Irrevocable Trust).

Additionally, they are categorized by purpose:

• Asset Protection Trust - To safeguard assets
• Blind Trust - Where the creator is unaware of management details
• Charitable Trust - For charitable purposes
• Generation-Skipping Trust - For estate planning across generations
• Grantor Retained Annuity Trust - For tax benefits
• Land or Real Estate Trust - For real estate management
• Marital Trust - For managing marital assets
• Special Needs Trust - For specific purposes

Benefits of Trust Funds

Trust Funds offer several advantages that make them popular financial tools:

1. Passing benefits without transferring ownership - Trusts can provide returns to third parties without transferring property rights, originally used for estate management but now extended to investments.
2. Alignment with intent - Trust management must follow the settlor’s wishes, as the certainty of intent is explicitly stated in the contract.
3. Tax benefits - Since there is no transfer of ownership, Trusts may offer tax advantages under the laws of each country.
4. Flexible management - Revocable Trusts allow expert management during the settlor’s illness or incapacity and can be revoked upon recovery.
5. High versatility - As a civil agreement among involved parties, establishing and amending Trusts is more flexible than registered funds requiring approval.

Trust Fund in Thailand: Investment Options

In Thailand, establishing a Trust is permitted only for fundraising in the stock market. The Securities and Exchange Commission has identified two types of Trusts:

Active Trust - Established to manage and generate returns from assets, such as II/HNW Trust Funds for institutional investors or REITs for real estate investments.

Passive Trust - Established to oversee assets for specific purposes, such as ESOP for directors and employees, EJIP for joint employer-employee projects, or Trusts for reserve funds and bond repayment funds.

Currently, most Trusts established in Thailand are REITs because real estate structures are easier to verify and hold, providing advantages to general investors since assets are tangible and verifiable, making it accessible even for novice investors.

Summary: Trust Funds as a Diverse Investment Option

Trust Funds are asset management tools originating from medieval England, where nobles entrusted land to trusted individuals to manage benefits for their families. Although originally used for estate management, today Trust Funds can manage almost any type of asset.

Important fact: REITs are a type of Trust, but not all Trusts are REITs, as Trusts have broader scope. For the general Thai investor, options are mostly limited to REITs, but this has advantages because real estate assets are tangible, easy to verify, and suitable for those wanting to invest in large assets without substantial initial capital.