Final answer:
A Private-Purpose trust fund is used by the government when managing fiduciary relationships outside of pension or investment trust funds, such as those for Medicare and Social Security. These trust funds are important for specific government expenditures and represent a notable part of the government's debt.
Step-by-step explanation:
When the government is in a fiduciary relationship governed by a formal trust agreement, other than those reported in pension or investment trust funds, a Private-Purpose trust fund is used. These funds are special accounts used to finance specific types of expenditures such as Medicare and Social Security. They involve instances where the government acts as a trustee for entities outside of the governmental reporting entity—like scholarships or private donations for specific purposes—hence the name Private-Purpose.
For example, when the government collects FICA tax from individuals, it invests that money in trust or government securities until the money is needed for disbursement. While this represents money the government owes to itself, it constitutes a significant part of the national debt. Trusts function as the 'family bank' to facilitate the transfer of assets to heirs according to the terms of the trust agreement, becoming irrevocable upon death of the trust creator.