Trust Preferred Stock

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Trust Preferred shares are issued by a trust which a corporation forms exclusively to purchase subordinated debt of the forming corporation.

Generally the process works like this–

  1. A corporation forms a trust.
  2. The trust sells preferred shares to the public (or some other type of buyer).
  3. The trust purchases subordinated debt from the forming corporation.
  4. The forming corporation then has to pay interest to the trust.
  5. The trust pays the preferred share holder a dividend.

The point of all of this is simply to avoid paying taxes.  If the corporation sold preferred shares to the public this would be a pure dividend payment–and this is paid with post tax dollars.  If the corporation forms a trust and the trust buys debt from the forming corporation the forming corporation is paying interest with pre-tax dollars, thus tax dollars are saved.

Because the corporations saves money on taxes–you the preferred owner, have to pay taxes at your full tax rate (interest is not a qualified distribution like dividends).

Trust Preferred shares, just like regular preferred shares, are generally callable after 5 years at par plus accrued interest.  Unlike regular preferred shares, Trust Preferred shares typically have a maturity date (which is tied to the maturity date of the debt they originally purchased from the forming corporation).


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Tim McPartland
Tim McPartland is a private investor with over 45 years of investing experience. His analysis, research and writing is devoted to the hunt for income producing securities of all types, but in particular specializing in preferred stocks, exchange traded debt and Master Limited Partnerships.
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