Preliminary Trust: Meaning and Applications in Investment

Many investors may have heard the term Trust, but some may still not fully understand what it is, its key features, and how it compares or differs from REITs or other types of funds. This article will explain the principles of operation, types, and methods of investing in this asset class to provide investors with a clearer understanding.

What is a Trust and How Does It Differ from REIT?

Generally speaking, a Trust is an asset management entity established under legal principles, with a settlor responsible for managing and administering the assets, then distributing the benefits to beneficiaries as specified in the agreement.

The main difference between a Trust and a REIT is that a Trust can manage various types of assets, such as funds, real estate, stocks, bonds, or other income-generating assets. In contrast, a REIT is a type of trust specifically established to manage real estate assets only.

In other words, a REIT is a trust, but with restrictions on the types of assets it manages. Additionally, both Trusts and REITs are not legal entities in their own right and are established through contracts.

Similarities and Differences with Mutual Funds

Mutual funds are another form of asset management, but they differ fundamentally from trusts. First, mutual funds have legal personality as legal entities, whereas trusts do not. Second, establishing a mutual fund requires registration and approval from regulatory authorities, while trusts are created through civil contracts, offering greater flexibility.

Stakeholders and Components of a Trust

The establishment of a Trust involves three parties:

• Settlor (Settlor): The original owner of the assets who transfers them to the trust.
• Trustee (Trustee): Responsible for managing the assets according to the agreement and can charge management fees.
• Beneficiary (Beneficiary): The person who benefits from the management of the assets and has the right to claim damages if the trustee manages improperly.

Additionally, establishing a trust requires three elements: clear intent to establish the trust, certainty of the assets involved, and certainty of the beneficiaries.

Benefits of Establishing a Trust

Using a Trust offers various benefits:

• Enables income from assets to be transferred to third parties without transferring the actual assets.
• Ensures management aligns with the owner’s objectives.
• May provide tax advantages depending on the laws of each country.
• Revocable trusts allow professional management during the owner’s illness or incapacity, and can be revoked once the owner can manage assets themselves.
• Highly flexible in setting up and modifying conditions.

Types of Trusts

Apart from classification based on revocability, trusts can be categorized into several types, such as:

• Asset Protection Trusts
• Blind Trusts (The settlor does not know how the trustee manages)
• Charitable Trusts
• Cross-generational Estate Planning Trusts
• Tax Planning Trusts
• Real Estate Management Trusts
• Marital Property Management Trusts
• Other Special Purpose Trusts

History and Evolution of Trusts

The concept of Trust originated in Roman times and was used for estate management. Later, in medieval England, nobles going to war would entrust land to trusted individuals to manage benefits and pass them on to their families. Trusts thus emerged from agreements and mutual trust between parties and have evolved into a vital tool for modern asset management.

Trusts in Thailand

In Thailand, Trusts are permitted solely for fundraising in the stock market, according to regulations by the Securities and Exchange Commission. There are two main types:

1. Active Trusts (Trusts for Management and Investment)

Established to manage assets for generating returns, such as:

• Investment trusts for institutional or large investors
• Real estate investment trusts (REIT)

2. Passive Trusts (Asset Holding Trusts)

Established to hold assets for specific purposes, such as:

• Employee Stock Ownership Plans (ESOP)
• Employer-Employee Joint Investment Trusts (EJIP)
• Bond redemption reserve trusts

Currently, most trusts established in Thailand are in real estate investment formats, making REITs more familiar to the general investors. The advantage of investing in these trusts is that investors can easily verify and scrutinize the assets, making them suitable for both beginners and experienced investors.

Summary

Trusts are legal and financial tools designed to manage various types of assets. Unlike REITs, which focus solely on real estate, trusts can manage a broader range of assets. However, REITs are a specific type of trust dedicated to real estate investment.

Understanding the nature of trusts helps investors choose suitable investment tools aligned with their needs and goals, especially for those looking to invest in large assets without substantial initial capital.