A widely held fixed investment trust (WHFIT) is a type of unit investment trust (UIT) with at least one interest held by a third party. Investors who purchase shares of the trust receive any regular payments of interest or dividends earned on the equities or bonds held in trust.
The third party, or middleman, is responsible for holding the unit shares as custodian.
Without this middleman role, the WHFIT would be simply a unit investment trust (UIT), and in many ways they function identically from an investor’s perspective.
WHFITS may invest in a fixed portfolio of stocks and bonds, or else real estate mortgage investments.
Widely held fixed investment trusts must have at least one third-party interest holder, or middleman. Otherwise, they function the same way as any other unit investment trust offering shares in a fixed portfolio of assets to prospective investors. Because the investors who fund the initial purchase of the assets in the portfolio typically participate as trust interest holders, widely held fixed investment trusts fall under the category of grantor’s trusts.
Trust interest holders receive dividend or interest payments derived from the underlying assets in the portfolio based upon the proportion of shares they hold. The presence of middlemen in the trust means investors may hold either direct interest in the trust or indirect interest if a middleman such as a broker holds the shares in another investor’s name.
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.
The U.S. Securities and Exchange Commission (SEC) considers unit investment trusts one of three types of investment companies, along with mutual funds and closed-end funds. Like mutual funds, widely held fixed investment trusts offer investors an opportunity to purchase shares in a diversified portfolio of underlying assets at a lower cost and with less hassle than it would take to build the portfolio independently. Unlike mutual funds, widely held fixed investment trusts offer a static portfolio of assets. They also specify a termination date on which the trust will sell the underlying assets and distribute the proceeds to investors.
The U.S. Internal Revenue Service (IRS) generally treats widely held investment trusts as flow-through entities for tax purposes. Because of this, the trust itself does not pay taxes on its earnings. Instead, individuals who invest in the trust receive a Form 1099 detailing their annual earnings and must pay taxes on those amounts as they would any other earned income.
One common variety of widely held fixed investment trust, the widely held mortgage trust, offers portfolios consisting of mortgage assets. In these cases, the trust typically purchases a pool of mortgages or other similar debt instruments tied to real estate. Investors earn returns based upon the interest collected on the underlying mortgages. The three major federal mortgage lenders, Freddie Mac, Fannie Mae, and Ginnie Mae, all periodically issue widely held mortgage trusts.
Related to this is a real estate mortgage investment conduit (REMIC), which is a special purpose vehicle that is used to pool mortgage loans and issue mortgage-backed securities (MBS).Real estate mortgage investment conduits hold commercial and residential mortgages in trust and issue interests in these mortgages to investors.
Mutual funds are open-ended funds, meaning that the portfolio manager can buy and sell securities in the portfolio. The investment objective of each mutual fund is to outperform a particular benchmark, and the portfolio manager trades securities to meet that objective. A stock mutual fund, for example, may have an objective to outperform the Standard & Poor’s 500 index of large-cap stocks.
Many investors prefer to use mutual funds for stock investing so that the portfolio can be traded. If an investor is interested in buying and holding a portfolio of bonds and earning interest, that individual may purchase a UIT or closed-end fund with a fixed portfolio. A UIT, for example, pays the interest income on the bonds and holds the portfolio until a specific end date when the bonds are sold and the principal amount is returned to the owners. A bond investor can own a diversified portfolio of bonds in a UIT, rather than manage interest payments and bond redemptions in a personal brokerage account.