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.
Colorado Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, commonly known as a Rabbi Trust, is a specialized financial arrangement designed to provide executive employees with nonqualified deferred compensation benefits in Colorado. A Rabbi Trust is established by an employer to set aside funds for the benefit of key executives or top-level employees, allowing them to defer a portion of their income or compensation until a later date, typically after they retire. These trusts are usually created to provide additional retirement income to the executives beyond what they receive from traditional qualified retirement plans like 401(k) or pension plans. The purpose of the Colorado Nonqualified Deferred Compensation Trust is to attract and retain talented executives by offering them an opportunity to accumulate and defer compensation in a tax-efficient manner. By deferring the receipt of income, executives can potentially lower their current tax liabilities, as the compensation is not subject to immediate income tax. Different types of Colorado Nonqualified Deferred Compensation Trusts for the Benefit of Executive Employees — a Rabbi Trust might include: 1. Defined Contribution Plans: In this type of trust, the employer makes contributions into the trust on behalf of the executives. The contributions are invested according to the executive's preferences or predetermined investment options. The eventual payout is based on the value of the contributions and any investment gains or losses. 2. Cash-based Plans: Cash-based Rabbi Trusts tend to be more common. Instead of contributions being invested in various assets, the employer simply sets aside funds for the executives. The ultimate payout is typically based on the overall value of the trust at the time of distribution, which can include interest or other growth accumulated over the deferral period. 3. Deferred Share Plans: In this type of trust, the employer contributes company shares or stock equivalents into the trust. The value of the shares and any subsequent appreciation or dividends earned are credited to the executive's account. Upon distribution, the executive receives the accumulated value based on the share price at that time. 4. Supplemental Executive Retirement Plans (SERPs): Although not technically a type of Rabbi Trust, SERPs are often used in conjunction with these plans. A SERP is a supplementary retirement plan that promises additional income to replace the limitations imposed by qualified plans. Funds can be contributed to a Rabbi Trust to facilitate the payment of benefits under a SERP. Colorado Nonqualified Deferred Compensation Trusts emphasize flexibility and customization to meet the needs of individual executives by allowing them to control the timing and extent of their income deferral. It also protects the executives' interests by ensuring that assets in the trust remain separate from the employer's general assets and are included in the trust's financial management. Overall, the Colorado Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust, is an effective tool for employers to reward and retain executive talent while providing executives with a tax-advantaged means to defer compensation and secure their financial future.
