What is Trust: An asset management tool investors should know about

Trust is a term many investors have heard in the capital markets, but many still do not fully understand what a trust is and how it differs from REITs or mutual funds. This article will gradually help you understand the concept of trusts, from their origins and types to investment opportunities for Thai investors.

What is a Trust? The Role of Asset Management According to the Owner’s Intent

A trust is a legal instrument designed to allow a trustee—an expert and knowledgeable party—to manage the owner’s assets as desired, with the returns paid to beneficiaries.

A key feature of a trust is that the owner of the assets does not have to transfer ownership. After establishing the trust agreement, the owner retains ownership rights but does not have direct rights to use or manage the assets. The assets managed within the trust can be diverse, including cash, real estate, stocks, bonds, businesses, artwork, debts, and other income-generating assets.

Benefits for Investors from Establishing a Trust

Why do people set up trusts? There are several important reasons:

Distribute returns to third parties without transferring ownership
This concept dates back to medieval England, where nobles going to war would entrust land to trusted individuals to manage benefits and pass them on to their families. This allowed families to benefit from the assets without a formal transfer of ownership. This was the beginning of trusts. It has become highly beneficial when applied to estate management.

Manage assets according to clear intentions
Establishing a trust requires explicitly stating the owner’s intentions, ensuring the trustee must strictly follow the agreement. This gives owners confidence that their assets will be managed according to their wishes, not the preferences of the manager.

Potential tax benefits
Since a trust does not transfer assets to third parties but only passes benefits, establishing a trust may help reduce tax burdens, depending on the laws of each country.

Asset management during incapacity
If the owner becomes ill or unable to manage their assets, a revocable trust allows professionals to continue managing the assets. When the owner can resume management, the trust can be revoked immediately.

Flexibility in establishment and modification
A trust is a contractual agreement among involved parties, making it easier to change conditions compared to setting up a fund, which requires approval from government authorities.

Types and Structures of Trusts

Types of Trusts Based on Revocability

Revocable Trust
The owner can revoke, modify, or cancel the trust at any time, offering high flexibility.

Irrevocable Trust
Once established, it cannot be changed or revoked, providing stability but less flexibility.

Types of Trusts Based on Purpose

There are also trusts for asset protection, estate management, charitable purposes, blind trusts, tax benefits, real estate management, special needs trusts, and many others.

Parties Involved in Setting Up a Trust: Three Roles

Settlor or Grantor
The individual who owns the assets and decides to establish the trust. After signing the agreement, the owner retains rights to the assets but not the benefits.

Trustee
An individual or institution appointed to manage the trust assets according to the agreement. The trustee has no stake in the benefits but can charge management fees.

Beneficiary
The person who receives benefits from the trust and can claim damages if the trustee mismanages.

Essential Elements of a Trust

A trust must have three components:

Certainty of Intent
The trust deed must clearly specify the settlor’s and trustee’s intentions without ambiguity.

Certainty of Subject Matter
The trust must have identifiable, existing assets with clear management guidelines to generate benefits.

Certainty of Object
The beneficiaries must be real persons, not missing or unknown, and capable of receiving benefits.

Trust vs REIT vs Mutual Funds: Similarities and Differences

Once you understand what a trust is, let’s see how it differs from other investment options.

Trust and REIT: More Similar Than You Think

Similarities:
REIT (Real Estate Investment Trust) is also a trust—just one that manages only real estate assets. Both have no legal personality, are established by trust deeds, and pay returns to unit holders.

Differences:
A trust can manage a variety of assets—cash, stocks, bonds, businesses, real estate—while REITs are limited to real estate. In essence, REITs are a type of trust, but not all trusts are REITs.

Trusts and Mutual Funds: Entirely Different

Mutual Funds are managed entities with legal personality, established to pool money from many investors for specific investment objectives.

Key differences:

• Legal Status: Mutual funds are legal entities; trusts are not.
• Establishment: Mutual funds require approval from regulatory authorities; trusts are contractual arrangements.
• Structure: Mutual funds have a central management team; trusts are managed by trustees.
• Flexibility: Trusts generally offer more flexibility in changing terms.

Investment Opportunities in Trusts for Thai Investors

Trusts in Thailand are Limited to Capital Market Fundraising

The Securities and Exchange Commission of Thailand permits trusts only for capital market fundraising, divided into two types:

Active Trusts
Designed to manage assets for profit, such as institutional investment trusts and real estate investment trusts (REITs), which are the most common for general investors.

Passive Trusts
Designed to hold and manage assets for specific benefits, such as employee stock ownership plans (ESOP), joint employer-employee investment trusts (EJIP), reserve accounts, or sinking funds for bond repayment.

Why Do Thai Investors Favor REITs?

Most retail investors’ trust investments are limited to REITs because they are primarily real estate trusts. The advantage is that real estate assets are easier to appraise and evaluate, making it accessible for new investors, unlike more complex trust assets.

Basic Knowledge Investors Should Have

A trust is a legal tool designed to have knowledgeable professionals manage the owner’s assets based on a trust agreement built on trust.

Understanding what a trust is and how it differs from REITs or mutual funds helps investors choose suitable investment options wisely. Currently, REITs are a popular choice for those wanting to invest in large assets without significant capital, as they can buy units and receive dividends similar to stocks, making investment opportunities accessible to small investors who previously only had access to large institutional investors.