What is an Income Trust?

An income trust is an investment trust where income-producing assets are held. It is also referred to as an income fund. Income-producing assets are anything that makes a steady amount of income for the investors.

The way that an income trust works is that the money in the trust is invested in assets that are expected to yield a return. Some of the money that income trusts typically receive are funds that are acquired by royalty payments, or interest accumulated from stocks, bonds, funds, and dividends. Many people are interested in investing in an income trust because of the luxury of having a consistent cash flow and favorable tax policies. The consistent cash flow that an income trust often provides can be more attractive than receiving lump sum amounts of money through capital gains.

Although income trusts are an attractive option for someone who desires to have a steady and reliable income based on the investments that they have made, there are risks involved when establishing an income trust. The higher the yield in an income trust, the higher the risk involved. Some of those risks include a lack of guaranteed income. A trust doesn't always guarantee money, especially if the trust is invested in a business that is beginning to fail. Income trusts have a similar risk level as dividend paying stocks, and investors can find fluctuations in their income, on both the high level as well as the low.

There are four specific types of income trusts that one could invest in. Those trusts include investment trusts, energy trusts, business trusts, and real estate trusts. One of the most popular trusts today are energy trusts. Establishing an energy trust allows a person to receive consistent income from paid distributions given by exploited natural resources such as oil. Business trusts are also popular, and allow a person the option of investing in numerous individual companies.

A broad range of companies, including manufacturing, distribution, and many other sectors, all have a portion of their business available for investors who want to establish a trust. Usually, income trusts are distributed to a large number of investors who have all placed their money in the trust. As the investment makes money, the investors are paid on an ongoing basis.

One potential risk that investors make when they place their money in an income trust is the possibility that distributions of cash could be reduced or suspended. There are various reasons an income trust could fall into financial trouble. Those reasons could include a souring global economy, an increase in foreign investors, the need for foreign capital, and an overall decline in business.