What Makes Investment Trust Funds Unique?

Investment trust funds are used to account for the external portion of investment pools and individual investment accounts held in trust. They are one of three fund categories, the other two being governmental and proprietary funds. These funds are used to record and report the normal resources and costs of the government. Investment trust funds are fiduciary funds, which are used when the government is entrusted with resources for the benefit of private individuals, organizations, or other governments. They are used to report fiduciary activities from the external portion of investment pools and individual investment accounts that are held in a trust that meets specific criteria.

Investment trust funds vs pension trust funds

A trust fund is an estate planning tool that holds property or assets for a person or an organisation. They can be established by multiple parties, including a grantor, a beneficiary or beneficiaries, and a trustee.

There are two types of trust funds: investment trust funds and pension trust funds.

Investment Trust Funds

Investment trust funds are a type of fund that is becoming increasingly popular. They are run by a professional manager who picks a portfolio of assets on behalf of clients. Investment trusts are listed companies, and shares in this company can be bought and sold on the stock market. The price of these shares is determined by demand and supply in the market. As companies, investment trusts also have boards and shareholder meetings.

Investment trusts can take on gearing, or borrowing additional money for investments, which unit trusts are not allowed to do. This means they can take bigger risks, leading to bigger rewards or losses. They are also allowed to keep back 15% of their profits for 'smoothing' purposes, which can help pay dividends in less fruitful years.

Pension Trust Funds

Pension trust funds are a type of employee trust fund, established as a job benefit. They are designed to help employees build retirement income over time, which can then be withdrawn in the form of annuity payments for life. Both the employer and the employee may contribute to a pension trust fund, and the employee begins receiving regular payments after retirement, with amounts based on length of service, age, and salary history.

Pension plans are not as common as they once were, especially in America, but they are still available to most public employees.

Key Differences

Both types of trust funds have their advantages and disadvantages, and it is important to understand how each works to determine which structure is right for you. Investment trust funds offer the potential for bigger rewards, but also carry more risk. Pension trust funds, on the other hand, provide a more stable form of retirement income, but may not be as widely available.

Investment trust funds and fiduciary duties

Investment trust funds are a type of fiduciary fund. Fiduciary funds are used to account for assets held in a trustee capacity or as a custodian for individuals, private organisations, other government units, and/or other funds.

Fiduciaries are persons or organisations that act on behalf of others and are legally and ethically bound to put their clients' interests ahead of their own. They are required to preserve good faith and trust and must act with complete fairness, loyalty, and fidelity.

Fiduciaries have a duty to disclose any conflicts of interest and have an ongoing duty to fully disclose opportunities that may arise during their fiduciary relationship. They must also disclose all material facts to beneficiaries or clients, especially when making investment decisions on their behalf.

In the context of investment trust funds, the fiduciary is the trustee, who is tasked with overseeing the management of property and assets within the trust. They are required to put the best interests of the trustor (or grantor) and the beneficiaries before their own.

Some of the specific fiduciary duties of a trustee include:

• Managing assets
• Evaluating markets
• Funding inheritances
• Paying taxes and fees
• Maintaining accounts
• Delegating tasks to financial advisors or attorneys if necessary

Overall, investment trust funds and fiduciary duties are closely intertwined, with the trustee of an investment trust fund having a fiduciary responsibility to act in the best interests of the trustor and beneficiaries.

Investment trust funds and tax benefits

Investment trust funds are a type of fiduciary fund, which are used to account for assets held in a trustee capacity or as a custodian for individuals, private organisations, and other governments. They are a legal entity designed to hold and manage assets on someone's behalf.

There are two main types of investment trust funds: grantor and non-grantor. In a grantor trust, the grantor controls the trust's assets and is responsible for reporting and paying taxes on the trust's income. All revocable trusts are grantor trusts, but not all grantor trusts are revocable. In a non-grantor trust, the trust itself is responsible for reporting and paying taxes on income.

The tax benefits of investment trust funds depend on the type of trust and the location of the trust. In the US, for example, irrevocable trusts can reduce or eliminate the amount of estate taxes owed after the grantor dies. Irrevocable trusts can also protect assets from creditors. In addition, the IRS permits trusts to claim a tax deduction for income distributed to beneficiaries, and the beneficiary pays the income tax on the taxable amount rather than the trust.

The taxation of trusts can vary significantly depending on whether the trust is a grantor or a non-grantor trust and whether and how much income and principal is distributed to a beneficiary. For non-grantor trusts, income distributions may greatly reduce the overall amount of income tax liability owed, depending on the tax situation of the beneficiary. It is critical to work with a tax advisor to consider the specifics when it comes to drafting and using trusts, including trust taxation, to avoid results that may differ from the original intent of your estate plan.

Investment trust funds and estate planning

Investment trust funds are a type of fiduciary fund, which are used to account for assets held in a trustee capacity or as a custodian for individuals, private organisations, or other governments. They are a legal entity that holds property and assets and can provide financial, tax, and legal protections.

Revocable vs Irrevocable Trusts

All investment trust funds are either revocable or irrevocable. A revocable trust, also known as a living trust, is created during the grantor's lifetime and can be altered or dissolved at any time. An irrevocable trust, on the other hand, is permanent once signed and funded, and cannot be altered by the grantor after its execution.

Estate Planning

Estate planning involves determining how an individual's assets and financial affairs will be managed and distributed after their death. Investment trust funds are a popular tool for estate planning as they can help to reduce estate taxes and avoid probate, the court-supervised process of distributing assets.

Grantor, Beneficiary, Trustee

The grantor is the person who creates and funds the trust. The beneficiary is the person who receives the assets or benefits from the trust. The trustee is responsible for managing the trust and carrying out the interests and wishes of the grantor. The trustee can be a neutral third party, such as an individual, a bank, or another professional fiduciary.

Types of Trusts

There are several types of investment trust funds that can be used for estate planning, including:

• Testamentary trust: Created by the terms of a will and funded upon the grantor's death.
• Grantor retained annuity trust (GRAT): Allows the grantor to put assets into a temporary trust, freezing its value and removing appreciation from the estate.
• Education trust: Beneficiaries can only use the funds for educational expenses.
• Spendthrift trust: The trustee decides how the beneficiary is allowed to use the money.
• Charitable trust: An irrevocable trust that donates assets to charities.
• Special needs trust: Supports beneficiaries with functional needs without disqualifying them from government benefits.
• Qualified personal residence trust: The grantor transfers their residence to their heirs but continues to live there for a specified period.
• Qualified terminable interest property (QTIP) trust: Supports a surviving spouse and, upon their death, transfers the remaining assets to the chosen beneficiaries.
• Generation-skipping trust: The grantor transfers money to grandchildren or people at least 37.5 years younger.

Considerations

When creating an investment trust fund for estate planning, it is important to consider the specific language used to ensure the trust is legally valid. Additionally, the formation of the trust should be done with the help of a legal or financial professional to ensure it serves its intended purpose and complies with state laws.

Investment trust funds vs private-purpose trust funds

Investment trust funds and private-purpose trust funds are both types of fiduciary funds. Fiduciary funds are used to account for assets held by a government entity in a trustee capacity or as a custodian/agent for individuals, private organisations, or other governments. They cannot be used to support the government's own programmes.

Investment Trust Funds

Investment trust funds are used to account for the external portion of investment pools and individual investment accounts held in trust. They are used when the assets are:

• Administered through a trust in which the government itself is not a beneficiary
• Dedicated to providing benefits to recipients in accordance with the benefit terms
• Legally protected from the creditors of the government

Private-Purpose Trust Funds

Private-purpose trust funds are used to report all other trust arrangements under which both principal and income benefit individuals, private organisations, or other governments. They are generally deemed either expendable or nonexpendable.

Differences

Investment trust funds are used for external investment pools and individual investment accounts held in trust, whereas private-purpose trust funds are used for all other trust arrangements. Private-purpose trust funds are also used when the principal and income benefit individuals, private organisations, or other governments, whereas investment trust funds are used when assets are dedicated to providing benefits to recipients.

Frequently asked questions