What is a Widely Held Fixed Investment Trust (WHFIT)?
A widely held fixed investment trust (WHFIT) is a type of unit investment trust (UIT) that includes at least one interest held by a third party. Investors who purchase shares in the trust receive regular payments of interest or dividends based on the equities or bonds contained within the trust.
Key Takeaways
- A WHFIT is an investment vehicle featuring at least one third-party participant.
- The third party serves as a custodian, holding the unit shares.
- WHFITs operate similarly to other UITs but include the unique variable of a third-party custodian.
- These trusts can invest in fixed portfolios of stocks, bonds, or real estate mortgage investments.
Understanding Widely Held Fixed Investment Trusts
WHFITs require at least one third-party interest holder, often referred to as a middleman. This middleman oversees holding the unit shares as stipulated. WHFITs otherwise mirror other unit investment trusts by offering shares in a fixed portfolio of assets to potential investors. Typically, the original asset-acquiring investors participate as trust interest holders, classifying WHFITs as grantor’s trusts.
Investors, known as trust interest holders, receive dividends or interest payments from the underlying assets based on their share proportion. The third-party role in the trust implies that investors may directly or indirectly hold interest, with brokers often refinancing trusts on behalf of beneficiaries.
WHFITs are classified as pass-through investments for tax purposes. The primary parties involved include:
- Grantors: Investors who pool funds to buy trust assets.
- Trustee: Generally a broker or financial institution managing the trust’s assets.
- Middleman: Usually a broker holding the unit shares on behalf of investors.
- Trust Interest Holder: Investors entitled to income generated by the trust’s holdings.
Other Types of Investment Companies
According to the U.S. Securities and Exchange Commission (SEC), unit investment trusts are among the three major types of investment companies, along with mutual funds and closed-end funds. Similar to mutual funds, WHFITs give investors access to a diversified portfolio at reduced cost and complexity. In contrast to mutual funds, WHFITs feature static portfolios of assets and specify termination dates for when underlying assets are sold and proceeds distributed to investors.
For tax purposes, the U.S. Internal Revenue Service (IRS) generally treats widely held investment trusts as flow-through entities. Consequently, the trust itself does not incur taxes; instead, investors receive a Form 1099 to report and pay taxes on their earnings akin to other earned income.
Widely Held Mortgage Trusts
One prominent example of WHFITs is the widely held mortgage trust. Such trusts often invest in portfolios of mortgage assets. Here, the trust purchases a pool of mortgages or alike debt linked to real estate. Investors secure returns through interest collections on the underpinning mortgages. Federal mortgage entities like Freddie Mac, Fannie Mae, and Ginnie Mae frequently issue such mortgage trusts.
Moreover, a real estate mortgage investment conduit (REMIC) pools mortgage loans for issuing mortgage-backed securities (MBS). These instruments hold commercial and residential mortgages in the trust and offer investor interests in these mortgages.
The Differences Between UITs and Mutual Funds
Mutual funds are open-ended, allowing portfolio managers to buy and sell securities within the portfolio to meet specific investment objectives, such as outperforming a benchmark like the Standard & Poor’s 500 Index. This trading ability appeals to investors who want an active portfolio managed by professionals.
UITs, contrastingly, are designed to remain static through a set term. For example, a bond-focused UIT may pay interest income to investors until a predetermined end date when the portfolio’s bonds are sold and the principal returned to owners. This static nature suits long-term investors interested in fixed income without actively managing their holdings.
Related Terms: unit investment trust, mutual funds, closed-end funds, pass-through investments, investment companies, flow-through entities, mortgage-backed securities, real estate mortgage investment conduit
References
- Internal Revenue Service. “Instructions for Form 1099-B (2021)”.
- Wells Fargo. “Important 2020 Tax Information Widely Held Fixed Income Trust (WHFIT)”.
- Cornell Law School. “26 CFR § 1.671-5 - Reporting for Widely Held Fixed Investment Trusts”.
