What is a (Trust) fund and how does it differ from a REIT?

Trust Fund (Trust) - Asset Management Tool You Need to Know

A trust fund is a legal instrument for managing and administering assets, with a (Trustee) appointed to oversee the assets of the settlor and distribute the returns generated from management to beneficiaries according to specified conditions.

The importance of a trust fund lies in its ability to facilitate the payment of returns from assets to third parties. However, it does not require the transfer of ownership of the assets to the third party; it depends solely on the management conditions specified. Assets that can be managed within a trust fund are diverse, including capital, real estate, stocks, bonds, various businesses, art, and other income-generating assets.

History and Background of Trust Funds

The concept of trust funds is ancient, dating back to Roman times. Originally, they were used to manage wills and inheritances. During the Middle Ages in England, nobles going to war would entrust land to trusted individuals to safeguard their interests and pass them on to their families. Over time, trusts were adapted for investment and asset management in various forms.

Benefits of Using Trust Funds

Using trust funds offers several advantages, including:

Flexibility in Management - Since trust funds are established by agreements between involved parties, they are highly flexible in setup and modification, unlike funds that require registration and approval from authorities.

Alignment with the Settlor’s Intent - Management must follow the clear intentions of the settlor, ensuring assets are handled according to their true wishes.

Tax Benefits - Setting up a trust fund does not constitute a transfer of assets to third parties but merely provides benefits, which may offer tax advantages depending on the laws of each country.

Protection in Crisis - Revocable trusts allow others to manage assets if the owner is ill or incapacitated, and once capable again, the owner can revoke and manage the assets themselves.

Types of Trust Funds

Revocable Trust (Revocable Trust) vs. Irrevocable Trust (Irrevocable Trust)

Besides the revocability aspect, trust funds can also be categorized into other types, such as Asset Protection Trust (Asset Protection Trust), Blind Trust (Blind Trust), Charitable Trust (Charitable Trust), Generation-Skipping Trust (Generation-Skipping Trust), Grantor Retained Annuity Trust (Grantor Retained Annuity Trust), Land or Real Estate Trust (Land or Real Estate Trust), Marital Trust (Marital Trust), and Special Needs Trust (Special Needs Trust), among others.

Main Parties Involved in Setting Up a Trust Fund - 3 Key Groups

1. The Settlor or Property Owner (Settlor)

The individual who owns the assets and decides to establish the trust. After the trust agreement is signed, the settlor retains ownership of the assets but cannot directly benefit from or manage the assets transferred to the trust.

2. The Trustee (Trustee)

Responsible for managing the assets according to the terms of the agreement. The trustee does not have rights to the benefits but can claim management and administration fees.

3. The Beneficiary (Beneficiary)

The person who receives benefits from the trust management. Beneficiaries can request damages if the trustee manages improperly and have rights to reclaim the assets.

Key Elements of Setting Up a Trust - 3 Components

A complete trust setup must include the following three elements:

Certainty of Intent (Certainty of Word) - A clear trust agreement between the settlor and trustee, explicitly stating the intentions of both parties.

Certainty of Subject Matter (Certainty of Subject Matter) - Clear and tangible assets with a management plan to generate benefits.

Certainty of Object (Certainty of Object) - A clear and living person who will benefit from the trust.

Comparing Trusts with REITs and Mutual Funds

Trust vs. REIT

A Real Estate Investment Trust (REIT) is a type of trust established solely to manage benefits from real estate. Both REITs and general trusts are not legal entities and are established through trust agreements.

Trust vs. Mutual Fund (Fund)

A mutual fund manages assets by pooling investors’ funds according to the fund’s objectives, then distributing dividends to unit holders. The key difference is that a mutual fund is a legal entity, whereas a trust is not. Additionally, their management and investment methods differ significantly.

Trust Funds in Thailand - Available Formats

In Thailand, the Securities and Exchange Commission permits the establishment of trust funds solely for raising capital in the stock market, divided into two main formats:

Active Trust (Active Trust)

Established to manage assets for generating benefits, such as trusts for institutional and high-net-worth investors (II/HNW Trust Fund) or trusts for real estate investment (REIT).

Passive Trust (Passive Trust)

Established to hold assets for specific purposes, such as employee stock ownership plans (ESOP) (ESOP), joint employer-employee investment projects (EJIP), or trusts for reserve funds and installment payments for bonds.

Currently, most trusts in Thailand are set up as REITs because real estate assets are easier to verify, making it accessible even for novice investors to buy and sell easily.

Summary

A trust fund is an asset management tool with a long history and high flexibility. Originally used for estate management, today it can manage various types of assets. When a trust fund is established with real estate assets, it is called a Real Estate Investment Trust (REIT).

Understanding trust funds is important because they enable investors of all levels to access large-scale assets more easily without requiring substantial initial capital. Coupled with professional management, trust funds have become an attractive investment option for Thai investors.