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What Are Income Trusts?


While the boom-bust nature of the stock market can be profitable over the long haul, seasoned investors and risk-averse workers approaching retirement may be looking for a way to get off the roller coaster. Not every investment has the same potential returns as stocks, but stable, moderate earnings from an income trust can be a suitable alternative. An income trust contains income-producing assets for private individuals or public investors. It is designed to distribute income regularly but can also be used to lower income. Here’s how it works.

A financial advisor can help you set up an income trust for your retirement. 

What Are Income Trusts?

Income trusts generate income for investors by holding profitable assets on their behalf. Individuals can create private income trusts for themselves and their families. Some trusts, such as real estate investment trusts (REITs), sell tradable shares accessible to the public.

Generally, the purpose of a trust is to earn and distribute income consistently. For example, if you want to provide income for your children or beneficiaries, you would create a personal trust fund and hire a trustee to oversee it. The trustee’s job is to manage and acquire profitable assets that produce sufficient income for you or your beneficiaries.

A personal trust’s creator, or trustor, defines how the trustee invests money and distributes income. As a result, personal trusts allow you to set up inheritances and limit beneficiaries’ control of the fund.

On the other hand, publicly traded trusts in the United States follow a strict set of laws to operate. Income trusts must hold diversified assets, issue 90% of their income to investors, and focus on industry-specific investments. For example, REITs can’t invest in energy.

Types of Income Trusts

SmartAsset: What Are Income Trusts?

Investors considering income trusts will encounter four types in the market:

Royalty trusts. Royalty trusts create revenue by investing in energy sources, like natural gas or oil wells. Royalty trusts don’t extract energy but own the rights to energy sources or the land containing them.

Investment trusts. Commonly known as mutual funds in the United States, investment trusts are companies that invest in a diversified collection of stocks, bonds, and other assets.

Real estate investment trusts. REITs invest in commercial real estate and personal mortgages. You can buy shares of REITs publicly like you can with mutual funds.

Business trusts. While many companies sell investors shares of stock, some companies use an income trust model, usually for tax advantages. Business trusts differ from other income trust types because they come from just one company instead of numerous diversified assets. For example, public utility companies often form business trusts. As a result, your local power company may be investible as an income trust.

Benefits of Investing in Income Trusts

If you invest in income trusts, you’ll enjoy the following advantages:

  • The government does not tax the money in a trust but taxes the income you receive from a trust. Therefore, individuals can generate considerable monthly income without a heavy tax burden.
  • Income trusts allow investors to diversify among numerous reliable companies.
  • Income trusts often incur less risk, meaning you’re more likely to receive steady income from your investment.

Risks of Investing in Income Trusts

Like other investments, income trusts don’t come without risk. Here are three things to consider:

  • Revenue from income trusts isn’t a sure thing. A struggling income fund may reduce or halt its distributions at any time, interrupting your cash flow. Additionally, you might not find a buyer for your holdings in a failing income trust, meaning you could lose a significant amount of money.
  • When market dynamics increase interest rates, operating expenses often increase for companies. As a result, income decreases, and investors might receive lower distributions.
  • While investors can choose from numerous income trusts, it can be challenging to determine an income trust’s business acumen and get ahold of accurate income statements from a trust.

Bottom Line

SmartAsset: What Are Income Trusts?

Income trusts are apt for creating a monthly revenue stream and reducing taxes. If you create a personal income trust, you can arrange your estate to provide payments to your beneficiaries. On the other hand, you can invest in publicly traded income trusts as you would stocks or bonds. While income trusts usually hold diversified portfolios, it’s a good idea for investors to do their homework before putting money into one.

Tips for Income Trusts

  • An income trust might be perfect for your portfolio. However, ideal investments can be challenging to discern without consulting a financial advisor. A financial advisor can help you create a financial plan that accounts for your income, financial goals, and investment preferences. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re looking for alternatives to traditional stocks, income trust are just one option. Use this guide to explore how to go beyond conventional investments.

Photo credit: © Kalinichenko, ©, ©