What is a Wasting Trust?

A wasting trust is so named because its assets are depleted over time as plan participants receive payouts as required under the plan. The trust receives no new contributions, so the principal declines. A wasting trust may also refer to income trusts which hold depleting assets, such as oil and gas assets. 

Key Takeaways

  • A wasting trust is so named because its assets are depleted over time as plan participants receive payouts as required under the plan. The trust receives no new contributions, so the principal declines. A wasting trust may also refer to income trusts which hold depleting assets, such as oil and gas assets. 
  • A wasting trust holds assets when a qualified plan is frozen. In a wasting trust, the trustee may use part of the principal to maintain the level of payments to the beneficiaries as required under the plan. This use of the principal funds is because income generated by the plan's assets may be insufficient to meet such payments. 

Understanding a Wasting Trust

A wasting trust holds assets when a qualified plan is frozen. In a wasting trust, the trustee may use part of the principal to maintain the level of payments to the beneficiaries as required under the plan. This use of the principal funds is because income generated by the plan's assets may be insufficient to meet such payments. 

Example of a Wasting Trust

A wasting trust could be set up, for example, when a company switches from a pension plan for its employees to a 401(k) plan. The company places the pension plan funds into a wasting trust, which continues to be debited for pension payouts. However, the fund is no longer credited with funds because current employee contributions go into the 401(k). The funds in the trust eventually “waste away” to zero.

Commercial Income Trusts

A commercial income trust holds income-producing assets and has publicly traded closed-end fund shares. Income trust managers typically seek to build a diversified portfolio of income-producing assets in the trust fund that will have a steady stream of distributions. Commercial income trusts can be bought and sold on financial market exchanges.

Closed-end funds typically have lower liquidity than open-end funds (ETFs). For this reason, many of the closed-end funds will trade by appointment, or when another investor is looking to move shares. Institutional investors will take liquidity into consideration when investing in products with lower volumes.

Income trust corporations are commonly known as real estate investment trusts. REITs are the most common corporate income trusts. They offer publicly traded shares on the open market and build a portfolio of income paying real estate investments. The income component of a corporate trust designated as a REIT makes the shares a good investment for income-focused investors. Registration as a corporation is required to build a portfolio of income-producing assets and offer publicly traded shares on an exchange.

REITs typically offer higher yields than other equity-like assets. Some REITs are considered defensive, while others can be riskier investments. REITs have become more popular in recent years and have many sub-industries: office, industrial, residential, timberland, health care, self-storage, infrastructure, and many others.

The chief designation that distinguishes real estate investment trust corporations is their election to file a Form 1120-REIT with the Internal Revenue Service. Tax laws for commercial trusts are detailed in Internal Revenue Code section 856. As a commercial income trust, entities have a great deal of latitude in how they structure their businesses. However, filing a Form 1120-REIT with the IRS designates them specifically as a real estate investment trust and requires them to pay 90% of their taxable income in distributions to their investors.