Energy or Royalty Trust - Explained
What is an Energy Trust?
Written by Jason Gordon
Updated at October 5th, 2021
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What is an Energy Trust?
An energy trust is a kind of business entity that invests in operational assets (such as oil, gas and other minerals). The majority of the profits generated from these resources are then distributed to investors. Energy trusts do not invest in stocks or in any other financial assets. The trust is generally organized as a master limited partnership.
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How Does an Energy Trust Work?
Energy trusts are generally not subject to taxation at the corporate level. This exemption is allowed only if the trust pays out more than 90% of their profits. This is one of the reasons that energy trusts distribute a major portion of earnings to investors. In a very similar way, energy trust resemble real investment trusts (REITs). However, energy trust that operates across the globe varies from country to country. For instance, energy trusts in the US are different from energy trusts that operate in Canada. For example, energy trusts of US may hold only gas and oil mineral rights; whereas, energy trusts that exist in Canada are allowed to include more minerals to the trust. And thus, the trust is able to functions for a long time. In contrast to Canadians energy trusts, energy trusts operating in US only hold fixed amounts of natural reserves and cannot acquire new minerals which can be depleted over time. Ultimately, US-based energy trusts may become worthless as the resources are depleted and sold.