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. 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. 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. 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. 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.
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.
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.
Related terms:
Beneficiary of Trust
A beneficiary of trust is the individual or group of people chosen to benefit from trust assets and the income they generate. read more
Benefit Offset
Benefit offset is a reduction in the amount of payments received by a member of a retirement plan when the member owes money to the plan. read more
Deferred Compensation
Deferred compensation is when part of an employee's pay is held for disbursement at a later time, usually providing a tax deferred benefit to the employee. read more
Employee Retirement Income Security Act (ERISA)
The Employee Retirement Income Security Act (ERISA) protects workers' retirement savings by ensuring fiduciaries do not misuse plan assets. read more
Estate Planning
Estate planning is the preparation of tasks that serve to manage an individual's asset base in the event of their incapacitation or death. read more
Matured RRSP
A matured RRSP is a government-sponsored Canadian registered retirement savings plan used to produce retirement income for the plan participant. read more
Pension Plan
A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. read more
Retirement Planning
Retirement planning is the process of determining retirement income goals, risk tolerance, and the actions and decisions necessary to achieve those goals. read more