What is a trust? Understanding an asset management tool different from REITs

Trust is a legal tool used for asset management. Many people may have heard of the term “Trust” but do not fully understand how it differs from REIT or whether it is similar to familiar mutual funds. This article will help you understand what a Trust is and how ordinary investors in Thailand can invest in trust funds.

What is a Trust? How does the legal mechanism for asset management work?

A Trust is a legal mechanism that allows a trustee, who has legal authority, to transfer assets from the owner to manage according to the owner’s intentions. The trustee then distributes the returns generated from managing the assets to the beneficiaries. The key feature of a Trust is that it can manage various types of assets, including capital, real estate, stocks, bonds, businesses, artwork, debts, and other income-generating assets.

In short, a Trust is a unit designed to manage the owner’s assets and distribute the returns to third parties according to the owner’s conditions and intentions.

Main components of establishing a Trust

To set up a Trust, three parties are involved:

• Settlor: The original asset owner who transfers assets to the Trust while retaining ownership but can no longer benefit from the assets.

• Trustee: Responsible for managing the assets according to the trust agreement, without personal interest, but can charge management fees.

• Beneficiary: The person who receives benefits from the Trust and can claim responsibility if the trustee acts improperly.

Additionally, a Trust must have three essential elements to be valid: (1) clear intent to establish the Trust, (2) actual and identifiable assets, and (3) definite identification of beneficiaries.

Main benefits of creating a Trust for asset management

A Trust is a flexible tool with many advantages in managing assets:

Benefit in distributing returns: Trusts enable the transfer of income from assets to third parties without transferring ownership directly. Initially, Trusts were used for estate management but have expanded into investment applications.

Benefit in fulfilling intent: Trusts ensure that asset management aligns with the owner’s objectives, as the establishment must specify clear intentions for the Trustee to follow.

Tax benefits: Trusts may offer tax advantages because establishing a Trust is not considered a transfer of assets to a third party but rather a benefit transfer, potentially reducing tax burdens according to each country’s laws.

Temporary management flexibility: Revocable Trusts allow experts to manage assets during the owner’s illness or incapacity and can be revoked when the owner regains control.

Flexibility: Trusts are flexible in setup and modification because they are civil contracts among involved parties, offering more diversity than fund establishment, which requires registration and approval from authorities.

Different types of Trust based on purpose

Trusts come in various forms. Besides dividing by revocability (revocable and irrevocable Trusts), they can also be categorized by purpose:

• Asset Protection Trust: Protects assets from legal claims.

• Blind Trust: The grantor does not know how assets are managed.

• Charitable Trust: Supports charitable organizations.

• Generation-Skipping Trust: Transfers assets across generations, e.g., to grandchildren.

• Grantor Retained Annuity Trust (GRAT): Reduces estate taxes.

• Land or Real Estate Trust: Manages land and property.

• Marital Trust: Protects assets within a marriage.

• Special Needs Trust: Manages assets for individuals with special needs.

History of Trust and its first establishment

The concept of a Trust originated in ancient Rome, initially used for managing wills. In medieval England, Trusts began to be used for managing the assets of living persons, such as nobles entrusting land to trusted individuals for benefit and inheritance purposes.

The establishment of a Trust is rooted in trust and civil contracts, not just legal tools for asset management but also a means to build confidence between the grantor and the trustee in safeguarding assets.

Trust vs REIT vs Mutual Funds: Understanding the differences clearly

Trusts are often compared to REITs and mutual funds, but each has distinct characteristics.

Trust and REIT: similarities and differences

REIT (Real Estate Investment Trust) is a type of Trust specifically established to manage returns from real estate. This makes REIT different from general Trusts, which can manage various asset types.

Both Trusts and REITs lack legal personality and are established based on trust agreements. REITs are a type of Trust, but not all Trusts are REITs, as REITs have specific asset type restrictions.

Trust and Mutual Funds: fundamental differences

Mutual Funds are asset management vehicles that pool investors’ money to invest according to the fund’s objectives, then distribute profits as dividends.

The key difference is legal status: Mutual Funds are legal entities, whereas Trusts are not. This affects how they are managed and their legal representation.

What types of Trust can investors in Thailand invest in?

Trusts are investment tools approved by the Securities and Exchange Commission of Thailand, established solely for raising funds in the capital markets. They are mainly divided into two categories:

Category 1: Active Trusts – for management and investment

Established to generate returns, examples include:

• II/HNW Trust Funds for institutional and high-net-worth investors.

• REITs for real estate investment.

Category 2: Passive Trusts – for holding and debt management

Established for specific purposes such as:

• ESOP Trust: for issuing and offering shares to directors and employees.

• EJIP Trust: for joint employer-employee investment programs.

• Reserve Account Trust: for setting up reserve funds and gradually paying debt bonds.

From this classification, REIT is a type of Trust. Currently, most Trusts established in Thailand are REITs, making it accessible for the general public to invest mainly through REITs. This is advantageous because real estate assets are tangible, allowing even novice investors to buy and trade with confidence.

Summary: Trusts are an investment option investors should know

In summary, a Trust is a legal instrument for managing assets based on contracts and trust. Although initially used for estate management, today Trusts are applied to nearly all asset types.

When the Trust’s assets are primarily real estate, it is called a REIT (Real Estate Investment Trust). After the Trustee manages and earns returns, these are paid out as dividends to unit holders, who are the beneficiaries of the Trust.

For investors considering large-scale assets but lacking sufficient funds to purchase directly, Trusts and REITs are highly attractive options, providing access to high-value assets with income-generating potential.