Wasting Trust

What it is

A wasting trust is a trust whose assets decline over time because the trust no longer receives new contributions and continues to make required payouts. The principal is gradually spent down until the trust is exhausted. The term also applies to income trusts that hold depleting assets (for example, oil or gas reserves).

How it works

• The trust holds remaining assets after a plan is frozen or closed to new contributions.
• Regular payments to beneficiaries are made from the trust’s income and, if necessary, from principal.
• No new funds are added, so the trust’s balance declines until depleted.
• The trust remains in effect solely to administer and distribute the remaining assets.

Common uses

• Employer pension plans that are frozen when a company switches to a different retirement plan (e.g., 401(k)). A wasting trust holds the frozen pension assets and pays retirees until funds run out.
• Estate planning where a will or trust provides for beneficiaries for a limited time or until funds are exhausted.
• Closed-end or income trusts backed by finite resources (natural resource trusts).

Trustee responsibilities

• Manage investments to balance current payouts with preserving assets where possible.
• Use discretion (within trust terms) about dipping into principal to meet obligations.
• Communicate with beneficiaries about the trust’s status and projected duration.
• Follow the trust document and applicable fiduciary laws.

Implications for beneficiaries

• Payments may decline or cease once assets are depleted.
• The duration of benefit depends on the trust’s initial size, payout rate, and investment performance.
• Beneficiaries should understand the trust’s terms and expectations for longevity.

Risks and considerations

• Fixed payout schedules can accelerate depletion if investment returns are low.
• Trustees may need to reduce payments or change investment strategy to extend the trust.
• Tax treatment depends on trust type and jurisdiction; seek professional advice for specifics.
• Trust terms may limit or prohibit changes, constraining trustee options.

Example

When a company freezes its traditional pension and shifts new contributions to a 401(k), it may place the pension’s remaining assets into a wasting trust. Retirees continue to receive their pension payments from that trust until the assets are exhausted.

Key takeaways

• A wasting trust holds assets that decline over time because no new contributions are made.
• It can arise from frozen pension plans, estate provisions, or trusts backed by finite resources.
• Trustees must manage payouts and investments to balance beneficiary needs and the trust’s longevity.