A method of deferring compensation for executives is the use of a rabbi trust. The instrument was named - rabbit trust - because it was first used to provide deferred compensation for a rabbi. Generally, the Internal Revenue Service (IRS) requires that the funds in a rabbi trust must be subject to the claims of the employer's creditors.
This information is current as of December, 2007, but is subject to change if tax laws or IRS regulations change. Current tax laws should be consulted at the time of the preparation of such a trust.
The California Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, also known as a Rabbi Trust, is a specialized financial arrangement designed to provide benefits and compensation to executive employees in California. This trust falls under the category of nonqualified deferred compensation plans, which offer increased flexibility and customization compared to traditional qualified retirement plans. A Rabbi Trust acts as a form of protection for executive employees by setting aside assets for their future needs. It is important to note that the term "Rabbi Trust" does not imply any religious or cultural affiliation; rather, it originated from a seminal tax case involving a rabbi. The main purpose of this trust is to ensure that funds allocated to executive employees as deferred compensation are safeguarded and accessible in the event of an employer's financial instability, corporate takeover, or change in ownership. By transferring assets to the trust, the executive employees can have peace of mind knowing that their deferred compensation will be segregated from the employer's general assets. It is essential to consult with legal and financial professionals who specialize in executive compensation when establishing a California Nonqualified Deferred Compensation Trust. They can guide employers and executives through the intricacies of the trust structure and ensure compliance with applicable laws and regulations. Different types of California Nonqualified Deferred Compensation Trusts for the Benefit of Executive Employees may include: 1. Voluntary Deferred Compensation Trust: This type of trust allows executive employees to voluntarily defer a portion of their earned income to the trust, often in conjunction with a formal executive compensation plan. By doing so, they can defer the tax obligations associated with this income until a future date, typically retirement. 2. Severance Pay Trust: Some employers establish a California Nonqualified Deferred Compensation Trust to hold funds designated for executive employees as severance pay. By using a trust for this purpose, employers ensure that these funds are securely set aside and available if and when the severance payments are due. 3. Change of Control Trust: In the event of a corporate takeover or a significant change in ownership, this type of trust safeguards deferred compensation for the executive employees. It ensures that even if the acquiring entity does not honor the original compensation agreements, the assets held in trust will still be available to fulfill the deferred compensation obligations. 4. Supplemental Executive Retirement Plan (SERP) Trust: A SERP trust is a popular option within the realm of California Nonqualified Deferred Compensation Trusts. It is designed to provide supplemental retirement benefits to executive employees beyond what traditional qualified retirement plans offer. By establishing a trust for this purpose, the employer can enhance executive benefits and attract top talent while ensuring the funds' protection and availability. In summary, the California Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, known as a Rabbi Trust, is a valuable tool to protect and secure deferred compensation for executive employees. Employers must carefully structure and administer these trusts in compliance with the relevant laws and regulations, with the assistance of professionals well-versed in executive compensation and trust management.
