What Is a Wasting Trust?

A wasting trust is a fund whose assets have been depleted over time as plan participants receive their required payouts and no new money is paid in. The term may also be applied to income trusts which hold depleting assets, such as oil and gas.

In either case, the principle held in the trust is declining in value. The trust will continue to pay out until its assets are exhausted.

Key Takeaways

  • A wasting trust is a fund with declining assets.
  • With new contributions to the trust frozen, the trustee of a wasting fund may be forced to dip into the principle held in trust in order to meet regular payments due to plan participants.
  • The wasting trust may be a private inheritance, a pension fund, or a closed-end fund.

Understanding a Wasting Trust

A wasting trust holds assets after a qualified plan is frozen. That is, once the plan has stopped accepting new contributions, a wasting fund holds the remaining assets.

Companies that offer pension plans use a wasting trust to phase out a traditional pension plan when they switch to a 401(k) or another type of company-sponsored retirement plan. The trust stays in existence long enough to pay out the remaining assets, while current employees contribute to the new plan.

Wasting trusts are also common in estate planning. A will may set aside a sum of money to be used by one or more beneficiaries until the money is exhausted.

The trustee may use part of the principal held in trust to maintain the payments to beneficiaries that are required under the plan.

Example of a Wasting Trust

If a company switches its employee retirement benefit from a pension fund to a 401(k) plan, it will create a wasting trust to hold the assets in its pension fund.

The pension fund is frozen. New employee contributions are going into the 401(k) fund, not the pension plan.

The company will continue to pay its obligations to its retired employees until the funds in the plan are exhausted.