What Is a Wasting Trust?
A wasting trust is a fund whose assets are reduced over time as participants receive their eligible payouts, with no new funds being added. In some cases, the term is also applied to income trusts holding depleting resources like oil and gas.
In both scenarios, the principle in the trust diminishes in value. The trust will continue to disburse payments until its resources are entirely exhausted.
Key Takeaways
- A wasting trust is a fund with decreasing assets.
- Without new contributions, the trustee may need to withdraw from the principal to satisfy regular payment requirements for participants.
- Wasting trusts can manifest as private inheritances, pension funds, or closed-end funds.
Insight into Wasting Trusts
A wasting trust holds assets once a qualified plan is frozen, meaning it no longer accepts new contributions. The remaining assets are maintained within the trust.
Often seen in pension plan transitions, companies employ wasting trusts to phase out traditional pension plans while moving employees to 401(k) or other retirement plans. The trust continues until all remaining assets are disbursed, during which current employees can contribute to the new plan.
In estate planning, a wasting trust might allocate a specific sum of money to beneficiaries, which lasts until the funds are depleted.
A trustee may even need to use part of the principal within the trust to ensure regular payments to the beneficiaries, as obligated by the plan structure.
An Example of a Wasting Trust
Consider a company that transitions its retirement benefit offering from a pension plan to a 401(k) plan. In this scenario, a wasting trust is set up to manage the pension fund’s remaining assets.
Here’s how it works: the pension fund no longer receives new employee contributions, as those contributions are redirected to the 401(k) fund. The company keeps fulfilling its financial obligations to retired employees from the pension fund until it is completely depleted.
Related Terms: trust fund, retirement plan, pension plan, 401(k) plan, estate trust.
References
Get ready to put your knowledge to the test with this intriguing quiz!
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## What is a “Wasting Trust”?
- [ ] A trust that rapidly gains value over time
- [ ] A trust that remains untouched until the grantor's death
- [x] A trust that is created to decrease in value as distributions are made over time
- [ ] A trust that never distributes any assets to beneficiaries
## What type of assets are typically held in a Wasting Trust?
- [x] Assets intended to be gradually distributed, like cash or liquid securities
- [ ] Real estate properties to be developed
- [ ] Illiquid assets with growth potential
- [ ] Collectibles like art and antiques
## Why might a grantor choose a Wasting Trust?
- [ ] To completely avoid distributing any assets
- [x] To provide beneficiaries with distributions over a specified period of time
- [ ] To increase the trust's value substantially over time
- [ ] To capitalize on untaxed capital gains
## How does the value of a Wasting Trust typically change over time?
- [ ] It remains constant until termination
- [ ] It increases with every passing year
- [x] It decreases as distributions are made
- [ ] It fluctuates based on market conditions
## In what situation is a Wasting Trust most appropriately used?
- [ ] When assets are to be accumulated without any set distribution plan
- [ ] In the transfer of complex business interests
- [ ] For speculative investments with high risk
- [x] When the intent is to provide beneficiaries with fixed distributions over a predefined period
## Which of the following would NOT typically be the use of a Wasting Trust?
- [ ] Annual educational expenses for beneficiaries
- [ ] Gradual distribution of a retirement fund
- [ ] Scheduled payments for life improvements
- [x] Preservation of assets for indefinite future growth
## What happens to the Wasting Trust when all distributions have been made?
- [ ] It continues to operate indefinitely
- [ ] It gains new assets automatically
- [ ] It transforms into another type of trust
- [x] It is terminated once its assets have been fully distributed
## Who usually manages the assets within a Wasting Trust?
- [ ] The beneficiaries directly
- [ ] A financial advisor without trustee status
- [ ] The government
- [x] A trustee or fiduciary appointed by the grantor
## Which characteristic is essential for an effective Wasting Trust?
- [ ] A fixed number of assets with zero liquidation
- [ ] Prohibitive terms on distributions
- [x] Clearly defined timeline and method for asset disbursement
- [ ] High-risk strategies for high returns
## A Wasting Trust is advantageous for which planning purpose?
- [ ] Unlimited wealth growth trust management
- [ ] Speculative short-term investments
- [x] Controlled gradual manual dispersal of finite resources
- [ ] Estate tax avoidance without touching the principal
