What Is a Wasting Trust?
Let me explain what a wasting trust is: it's a fund where the assets get depleted over time because plan participants are receiving their required payouts, and no new money is coming in. You might also hear this term for income trusts that hold assets like oil and gas, which naturally deplete.
In both scenarios, the principal in the trust is losing value. The trust keeps paying out until everything is gone.
Key Takeaways
- A wasting trust is a fund with declining assets.
- With new contributions frozen, the trustee might have to dip into the principal to meet payments to participants.
- It could be a private inheritance, a pension fund, or a closed-end fund.
Understanding a Wasting Trust
You should know that a wasting trust holds assets after a qualified plan gets frozen—meaning no more new contributions. The wasting fund manages what's left.
Companies use these when they phase out traditional pension plans and switch to something like a 401(k) or another retirement plan. The trust sticks around to pay out the remaining assets, while current employees put money into the new plan.
They're also common in estate planning. A will might set aside money for beneficiaries to use until it's all spent.
The trustee can tap into the principal to keep up the required payments to beneficiaries.
Example of a Wasting Trust
Here's a straightforward example: if a company changes its employee retirement from a pension to a 401(k), it sets up a wasting trust for the pension assets.
The pension is frozen—no new contributions go there; they're all directed to the 401(k).
But the company still pays its retired employees from the pension until the funds run out.
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