Definition
The term accumulation trust refers to an estate planning tool that does not distribute assets placed into, or the income derive from, a trust. Accumulation trusts eventually terminate, and distribute assets, when certain conditions are satisfied.
Explanation
Accumulation trusts are not favored by the Internal Revenue Service, and are oftentimes limited by state law as to the accumulation timeline or value of assets. Accumulation trusts do not distribute assets held in the trust, or the income derived from those assets. As the name implies, they are used to gather and hold assets until certain conditions are met, which are outline when the trust is first created by the settlor, or donor. Once the conditions are met, or the accumulation period allowed by law is reached, the assets in the trust are distributed.
Example
Over his lifetime, Tom has accumulated a large estate and would like to share some of his wealth with his son Robert. Fearing that Robert might decide a college degree is no longer necessary, Tom creates an accumulation trust. The trust's documents, as directed by the donor Tom, indicate that once Robert obtains a Bachelor's degree, the trust will terminate and the assets distributed to Robert.