Tax Exempt Entities | Rabbi Trust Services

457(f) Plans and Rabbi Trust Services

Rabbi Trusts

A popular method of deferring compensation for executives is the use of a rabbi trust (so named because it was first used to provide deferred compensation for a rabbi). The rabbi trust is a type of nonqualified deferred compensation arrangement in which amounts are transferred to an irrevocable trust to be held for the benefit of executive employees, similar to a vested trust. The trust is designed to provide some assurance that future benefit obligations will be satisfied. We have worked with a trust provider to create a special trust that allows assets to be held away from the trust provider allowing us to create a customized mutual fund portfolio based on individual goals of both the organization and the executive.

The IRS will find a valid rabbi trust exists if all three conditions are met:

• The trust’s assets must be available to all the general creditors of the employer if the employer files for bankruptcy.
• There are no insolvency triggers that hasten payments to employees when the employer’s net worth falls below a certain point, thereby bypassing creditors before insolvency is declared.
• There is a procedure to provide notice to the trustee of the bankruptcy of the employer of financial hardship of the employer.

Because a rabbi trust is subject to the claims of the employer’s general creditors, the employer is considered the owner of the trust and the executive is not subject to tax on the deferred amounts until payments are actually received. When payments are actually received and the executive is taxed, the employer my take a corresponding deduction.