What is a Trust-Preferred Security?

If you are looking for a financial balance with your long-term investment strategy, a trust-preferred security may have it. This type of investment consists of both equity and debt issues. Bank holding companies typically issue a trust-preferred security by creating trust and issuing debt to the new entity.

Corporations will usually create a “trust” to issue securities. The creating corporation provides the money for the security which is considered debt. By doing so, a bank holding company is established. It then is subject to the same rules that apply to any holding company and a trust-preferred security is formed.

Trust-preferred securities offer their investors favorable tax, accounting, and credit treatment and since they are typically issued by a bank holding company, they are treated as capital (equity/own funds) rather than as debt for regulatory purposes – thus resulting in major tax benefits.

Dividends for trust preferred securities could be paid quarterly or semi-annually to the investors. In exchange for all those benefits the investors’ money may be occupied for a period of up to thirty years, but early redemption is possible if necessary.

Although there are many advantages to trust-preferred securities, the cost may prohibit smaller investors from participating in their bounties. The costs for purchasing these investments as well the high fees associated with them limits who can take advantage of these investments.

Before investing in trust-preferred securities investors need to fully read the prospectus or any written material describing the opportunity. The market is extremely volatile and very few investment opportunities have minimum or low risk. Speak to your trusted financial advisor and do some serious web research before committing to any type of financial plan on your own. The long term risks and benefits need to be considered before signing on the dotting line.