NOTE – There are 2 separate charts below–
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–
- A corporation forms a trust.
- The trust sells preferred shares to the public (or some other type of buyer).
- The trust purchases subordinated debt from the forming corporation.
- The forming corporation then has to pay interest to the trust.
- 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).