Trusts [CapiPedia]

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====== Trusts ======
A trust is a powerful legal arrangement where one party, known as the [[settlor]] (or grantor), gives a second party, the [[trustee]], the right to hold and manage [[assets]] for the benefit of a third party, the [[beneficiary]]. Think of it as a secure lockbox for your assets with a trusted manager who has a clear set of instructions on how to use them. While often associated with estate planning for the ultra-wealthy, trusts come in many forms and are incredibly useful tools for ordinary investors. They can range from personal arrangements designed to protect family wealth, such as a [[revocable trust]] or an [[irrevocable trust]], to publicly traded investment vehicles that allow you to own a slice of a professionally managed portfolio. The core idea is always the same: separating the legal ownership (trustee) from the beneficial ownership (beneficiary) to achieve specific financial goals, be it tax efficiency, asset protection, or simplified investing.
===== The Three Key Players =====
Every trust is like a three-character play. Understanding who's who is crucial to grasping how a trust works.
  * **The Settlor (or Grantor):** This is the creator. The settlor is the person who establishes the trust, transfers their assets into it, and writes the rulebook (the trust deed) that the trustee must follow.
  * **The Trustee:** This is the manager. The trustee is the individual or entity (like a bank or trust company) legally responsible for managing the trust's assets according to the settlor's instructions. They have a //fiduciary duty// to act in the best interests of the beneficiaries.
  * **The Beneficiary:** This is the recipient. The beneficiary is the person, group of people, or even an organization that receives the benefits from the trust, such as income payments or the assets themselves.
===== Why Bother with a Trust? =====
For an individual, setting up a personal trust can offer several compelling advantages beyond simply holding investments.
  * **Avoiding Probate:** Assets held in a trust typically bypass [[probate]], the often lengthy and expensive court process for distributing a deceased person's estate. This means assets can be transferred to beneficiaries more quickly and privately.
  * **Control and Protection:** Trusts allow you to control how your assets are used even after you're gone. You can specify that funds be used for a grandchild's education or delay a distribution until a beneficiary reaches a certain age. They can also offer protection from creditors.
  * **Tax Planning:** Certain types of trusts can be structured to help minimize [[inheritance tax]] and [[capital gains tax]], preserving more of your wealth for your intended heirs.
===== Trusts for Investors: A Closer Look =====
For most investors, the term 'trust' will most often be encountered in the form of publicly traded investment vehicles. These offer a convenient way to gain diversified exposure to various asset classes.
==== Investment Trusts (aka Closed-End Funds) ====
An [[investment trust]] is a publicly-listed company whose business is to invest in the shares of other companies. Don't let the name confuse you; in the US, they are more commonly known as [[closed-end fund]]s. Unlike their more famous cousins, [[mutual fund]]s (or [[open-end fund]]s), investment trusts have a fixed number of shares that trade on a [[stock exchange]] just like any other company.
This structure is what makes them fascinating. Because their shares trade freely, their price is determined by supply and demand, not just the value of their underlying investments. This means an investment trust can trade at:
  * **A [[discount]]:** The share price is //lower// than the trust's [[Net Asset Value (NAV)]] per share.
  * **A [[premium]]:** The share price is //higher// than the trust's NAV per share.
==== Real Estate Investment Trusts (REITs) ====
[[Real Estate Investment Trusts (REITs)]] are a special type of trust that pools investor capital to buy and manage a portfolio of income-producing properties, such as office buildings, shopping centers, or apartment blocks. REITs must pay out most of their taxable income to shareholders as dividends. They trade on major stock exchanges, giving investors the ability to invest in a diversified real-estate portfolio with the same [[liquidity]] as a stock.
===== The Value Investor's Angle =====
The structure of investment trusts (closed-end funds) creates a special opportunity that should make any value investor's ears perk up: **the discount to NAV.**
Buying an investment trust at a significant discount is a classic application of [[Graham]]'s [[margin of safety]] principle. You are literally buying a basket of assets for less than its current market worth—getting a dollar's worth of stocks for, say, 90 cents.
However, a true value investor doesn't just buy any discount. The key is to investigate //why// the discount exists. Is it due to poor management, an unpopular investment strategy, or simply market neglect? A deep discount on a trust with a solid underlying portfolio and competent management can be a fantastic opportunity. If the market sentiment improves or the management takes action to narrow the gap, an investor can win in two ways: from the appreciation of the underlying assets and from the closing of the discount itself. This requires the same diligent research as buying any individual company: you must understand what you own and why it's cheap.