What Is a Widely Held Fixed Investment Trust (WHFIT)?
Let me explain what a widely held fixed investment trust, or WHFIT, really is. It's a specific type of unit investment trust (UIT) that involves at least one interest held by a third party. If you're an investor buying shares in this trust, you'll receive regular payments from the interest or dividends earned on the stocks or bonds held within it.
Key Takeaways on WHFITs
You should know that a WHFIT is an investment setup where at least one third-party middleman is involved. This middleman acts as a custodian for the unit shares. Without them, it would just be a standard UIT, and from your perspective as an investor, they operate pretty much the same way. WHFITs can hold a fixed portfolio of stocks and bonds, or even real estate mortgage investments.
Understanding Widely Held Fixed Investment Trusts
WHFITs require at least one third-party interest holder, often called a middleman—otherwise, they're identical to other UITs that offer shares in a fixed asset portfolio. Since investors who fund the initial asset purchase become trust interest holders, these fall under grantor trusts. As a trust interest holder, you'll get dividend or interest payments based on your share proportion from the underlying assets.
The middleman's presence means you might hold a direct interest or an indirect one if a broker holds shares in your name. For taxes, WHFITs are pass-through investments, so the trust doesn't pay taxes— you do, on your earnings.
Parties Involved in a WHFIT
- Grantors: These are the investors pooling money to buy the trust's assets.
- Trustee: Usually a broker or financial institution managing the assets.
- Middleman: Typically a broker holding unit shares for a client or beneficiary.
- Trust Interest Holder: The investor owning shares and entitled to the trust's income.
Other Types of Investment Companies
The SEC classifies UITs, including WHFITs, as one of three main investment companies, alongside mutual funds and closed-end funds. Like mutual funds, WHFITs let you buy into a diversified portfolio cheaply and easily, without building it yourself. But unlike mutual funds, WHFITs keep a static portfolio and have a termination date when assets are sold and proceeds go to you.
The IRS treats these as flow-through entities, meaning no taxes at the trust level—you'll get a Form 1099 for your earnings and pay taxes like on any income.
Widely Held Mortgage Trusts
One popular form is the widely held mortgage trust, which focuses on mortgage assets. Here, the trust buys pools of mortgages or similar real estate debt, and you earn returns from the interest on those. Major players like Freddie Mac, Fannie Mae, and Ginnie Mae issue these regularly.
Related to this, a real estate mortgage investment conduit (REMIC) is a vehicle that pools mortgages and issues mortgage-backed securities. REMICs hold commercial and residential mortgages in trust and sell interests to investors like you.
The Differences Between UITs and Mutual Funds
Mutual funds are open-ended, so the manager can trade securities to beat a benchmark, like the S&P 500 for stocks. Many investors choose them for active stock trading. If you're into buying and holding bonds for interest, a UIT or closed-end fund with a fixed portfolio might suit you better.
A UIT pays bond interest and holds until a set end date, then sells and returns principal. This way, you can own diversified bonds without handling payments and redemptions in your own account.
