The term widely held fixed investment trust refers to an agreement involving the purchase of a portfolio of assets while issuing unit shares to investors. Widely held fixed investment trusts fall into two categories: widely held mortgage trusts and non-mortgage widely held fixed investment trusts.
Widely held fixed investment trusts are structured as grantor trusts, which means the grantor is also a beneficiary of the trust. Under these conditions, the Internal Revenue Service (IRS) requires the grantor to pay taxes owed on income generated by the trust, even if the distributions are not made to the grantor. This happens when a widely held fixed investment trust (WHFIT) is established by investors.
As indicated earlier, WHFITs are classified as pass-through investments for income tax purposes. The parties involved in the creation and maintenance of a WHFIT include:
- Grantors: Investors that pool their money to purchase the assets placed in the trust.
- Trustee: Typically a broker or financial institution that manages the trust's assets.
- Middleman: Usually a broker that holds the unit shares in the trust on behalf of their client / beneficiary.
- Trust Interest Holder: This is the investor that owns unit shares in the WHFIT and is entitled to income generated by the trust.
Generally, WHFITs take one of two forms:
- Widely Held Mortgage Trusts (WHMT): The underlying assets typically consist of mortgages and similar forms of real property investments such as a real estate mortgage investment conduit (REMIC).
- Non-Mortgage Widely Held Fixed Investment Trusts (NMWHFIT): This includes unit investment trusts such as royalty and commodity trusts as well as holding company depository receipt trusts.
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