Understanding Trust: Essential Asset Management Tool You Need to Know

What is a Trust and Why Should You Understand It

If you’re new to the investment world, you might come across the terms “Trust” or “ทรัสต์” frequently, but you may not fully understand what it really is or how it differs from REITs and mutual funds. Today, we will explore what a Trust means, what it is, and whether it is suitable for individual investors like us.

A Trust is a legal tool for managing assets where a person called a Trustee receives transfer of assets from the owner and manages them to generate returns and benefits for the (Beneficiary).

Assets that can be placed into a Trust include various types: cash, real estate, stocks, bonds, businesses, income-generating assets, etc. This is why Trusts are more flexible than other investment forms.

Why Trusts Are Beneficial: Key Advantages You Should Not Miss

1. Distribute benefits without transferring ownership

Trusts allow you to pass on returns from assets to others without actually transferring ownership. Originally used for estate management, this method has been adapted for investment purposes.

2. Managed according to the founder’s intent

When establishing a Trust, you need to clearly specify your intent (Certainty of Word), which the Trustee must strictly follow, ensuring that assets are managed as you desire.

3. Potential tax benefits

In many countries, Trusts can offer tax advantages because setting up a Trust is not considered a transfer of assets but merely a benefit transfer (depending on each country’s laws).

4. Flexibility in modification

Revocable Trusts (Revocable Trust) allow professional management of assets during times when you are ill or unable to manage them yourself, and you can revert to your own management when recovered.

5. Flexibility in establishment and operation

A Trust is a contract between parties, making it more flexible than setting up a fund that requires licensing and registration with authorities.

How Many Types of Trusts Are There and Which One Is Right for You?

Based on modification conditions

• Revocable Trust (Revocable Trust): The founder can modify or cancel it.
• Irrevocable Trust (Irrevocable Trust): Once established, it is very difficult to cancel or modify.

Based on purpose

• Asset Protection Trust: To protect assets
• Blind Trust: The founder does not know how it is managed
• Charitable Trust: For charitable purposes
• Generation-Skipping Trust: For inheritance across generations
• GRAT (Grantor Retained Annuity Trust): For tax benefits
• Land Trust / Real Estate Trust: For managing real estate
• Marital Trust: For marital assets
• Special Needs Trust: For individuals with special needs

Who Are the 3 Key People Involved in Setting Up a Trust?

Establishing a Trust involves three key parties:

1. Settlor (The founder/asset owner)

The individual who owns the original assets. When signing the Trust agreement, they still retain ownership but cannot benefit from or manage the assets transferred.

2. Trustee (The manager)

An individual or institution responsible for managing the assets according to the agreement. They do not have a share of the benefits but can charge management fees.

3. Beneficiary (The recipient of benefits)

The person who receives benefits from the Trust according to the agreement. They have the right to claim if the Trustee mismanages and can recover the assets.

Three Critical Factors for a Proper Trust Setup

A valid Trust must have:

1. Certainty of Word (Clarity of intent)

The Trust agreement must clearly specify the intentions between the founder and the manager.

2. Certainty of Subject Matter (Clarity of assets)

Assets must be clear, real, and manageable to generate returns.

3. Certainty of Object (Clarity of beneficiaries)

Beneficiaries must be real persons, not unknown or deceased individuals.

Trust vs REIT vs Mutual Funds: Who Wins?

Trust vs REIT

REIT (Real Estate Investment Trust) is a type of Trust that specifically manages real estate.

Similarities:

• Both are not legal entities
• Both are established by contract

Differences:

• Trusts can manage various asset types, but REITs are limited to real estate
• REITs have restrictions, but Trusts are not necessarily REITs

Trust vs Mutual Funds (Fund)

Mutual Funds are another investment tool.

Differences:

• Legal Status: Funds are legal entities; Trusts are not
• Operation: Funds pool money from investors to invest according to objectives; Trusts transfer assets directly for management
• Approval: Funds require licenses and registration; Trusts are more flexible

Trusts in Thailand: What Options Are Available?

Thailand permits Trusts only for fundraising in the stock market, divided into two types:

1. Active Trust (Trust for Investment and Management)

Established to manage assets for returns, such as:

• II/HNW Trust Funds: For institutional and wealthy investors
• REITs: Investing in real estate

2. Passive Trust (Trust for Holding and Debt Payment)

Established to oversee assets such as:

• ESOP: Employee stock ownership plans
• EJIP: Employee and employer joint investment trusts
• Reserve Account / Sinking Fund: Trusts for bond repayment

Currently, most individual investors in Thailand access Trusts mainly through REITs, as they are easy to verify and many investors, including beginners, can invest in them.

Summary: Trust Is a Tool You Should Know

Trust translates to “asset management tool,” which is correct, but its deeper meaning is a flexible and efficient asset management system. Originally used for estate management, today it applies to almost all asset types.

When a Trust manages real estate, it is called a REIT, which differs from general Trusts (that may manage other asset types), and also differs from mutual funds in legal status and operation methods.

For Thai investors like us, access to Trusts is often through REITs, which are a good option if you want to invest in large assets with limited capital. Just purchasing REIT units already includes exposure to these assets.