What Is an Income Trust?

What is an Income Trust?

An income trust is an investment that may hold various types of securities. These may include equities, debt instruments, real estate, etc. It is beneficial for the financial requirements of institutional investors, such as pension funds. Similarly, old-age investors may also prefer income trust that can provide a steady return.

The primary reason why income trusts are attractive is the promise of paying investors a steady income. These become more attractive when the prevalent bonds in the market yield low cash returns. Most investors prefer income trusts because they do not target unrelated investments. If an income trust is for stock investments, it cannot target real estate investments or vice versa.

There are various structures for income trusts. They may either come in the form of personal investment funds or commercial trusts with publicly traded fund shares. Usually, income trusts have managers that actively manage it and seek to build a diversified portfolio for investors. The goal with these portfolios is to include assets that produce a steady income.

What is a Personal Income Trust?

Income trusts may come in the form of trust funds used to manage the portfolios for a closed group of people. It is common for families to use income trusts to manage their collective assets or structure inheritances. The goal for income trusts is to contain income-producing assets. Usually, a trustee manages these trusts on behalf of the trustor to pass the asset to the trust's beneficiary.

Personal income trusts may include various terms. These may consist of terms related to the beneficiary's involvement and inheritance transfer. These terms will also provide details about how the trustee should manage and administrate the trust. Apart from these, they may also include more detailed terms associated with various aspects of trust.

What are Publicly Traded Income Trusts?

Publicly traded income trusts are different from private income trusts. Investors can buy the shares to public income trusts on the financial market. However, they can only find income trusts registered as corporations in the financial markets. The most common form of publicly traded income trusts is Real Estate Investment Trusts (REIT).

REITs offer publicly traded shares on the open market. The purpose of REITs is to build a portfolio of income-paying investments. However, these investments are only in real estate. It represents a great investment for investors looking to diversify their portfolio through asset allocation. Similarly, it is a suitable option for income-focused investors.

What are the risks of Income Trusts for investors?

Income trusts have similar risks for investors as dividend-paying stocks. It is because income trusts are equity investments and not fixed-income securities. Therefore, they share the same risks that come with stock ownership for investors. However, they may not come with the same rights and responsibilities. For example, they do not come with voting rights like traditional stock.

Some other risks also accompany income trusts. These risks may sometimes come due to their similarities with stocks. For example, like most stocks, they do not come with guaranteed income. Similarly, investors get exposed to interest rate risk when investing in income trusts.

Conclusion

Income trusts are an investment which comes with various types of securities. They usually promise a steady income, which makes them more attractive to some investors. There are two prominent types of income trusts, which include personal and publicly traded income trusts.

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