What is a UIT (unit investment trusts), and should your business consider it?

A UIT or Unit Investment Trust is a US investment company offering a fixed unmanaged portfolio of securities that has a definite life. They are assembled through a sponsor and usually sold through a broker. The two main types of UIT investments are stock (equity) trusts and bond (fixed income) trusts.

Stock trusts vs. Bond trusts
Stock trusts are designed to provide capital appreciation or dividend income. They can issue as many shares as they need to for a specific period of time before the primary offering period closes. Equity trusts have a specified termination date; the trust will then liquidate and distribute its net asset value as proceeds to the unit holders.

Bond trusts on the other hand issue a set number of units. When that set number of units are sold to various investors the primary offering period closes. Bond trusts will pay a monthly income in consistent amounts until the trust matures. When it has matured the funds are distributed to clients by a pro rata return of principal. The trust will then continue to pay the new monthly income until the next bond is redeemed. This process continues unit all the bonds have been liquidated. Bond trusts are great for clients or businesses seeking current income and stability of principal.

Some distinguishing characteristics of Unit Investment Trusts


• A unit investment trust usually issues redeemable securities much like a mutual fund. This means that the UIT will buy back an investors unit if the investors wants it to at the net asset value.


•  Like close-end funds a unit investment trust will often make a one time public offering of a specific fixed number of units.


•  Every unit investment trust will have a termination date in which it will end or dissolve. This is established when the UIT is created. The length of the UIT can sometimes be up to fifty years. When a unit investment trust terminates the remaining portfolio securities are sold and the profits are paid to the investors.


•  A unit investment trust does not trade its investment portfolio. It buys a fixed portfolio of securities and holds them for the life of the UIT. Because the investment portfolio is fixed, an investor knows that they are investing for the duration of the investment.


•  A unit investment trust does not operate with a board of directors, investment advisor, or corporate officers during the life of the trust.

Unit investment trusts and taxes
From a tax perspective unit investment trusts provide a shelter from unrealized capital gains taxes that are typically found inside of a mutual fund. Individual UIT's are assembled and purchases for specific time periods and the costs consists of the initial purchase price of the security. A mutual fund taxes the individual based on the whole previous tax year regardless of the purchase date. An investor could purchase a mutual fund, absorb a loss during the last quarter of the year and still be taxed on capital gains. A UIT avoids this type of tax consequence by putting together an entirely new fund for each investor.

Unit investment trusts can be a good investment for the right business. They offer some significant advantages of mutual funds, taxes being one of those benefits. If you are not familiar with the way they work through you might be better of trying your luck with mutual funds first as they can provide a less risky investment.