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.
Delaware Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust is a specialized financial instrument designed to provide executive employees with deferred compensation benefits in a tax-efficient manner. It is specifically established in the state of Delaware and follows the guidelines outlined in the Internal Revenue Code Section 402(b). This trust arrangement allows eligible executive employees to defer a portion of their income and defer the payment of taxes until a later date, typically retirement. Contributions made by the executive employees are held within the trust and invested according to the trust's investment policy. The accumulated funds grow tax-deferred, allowing individuals to potentially benefit from compounding growth over time. Unlike traditional deferred compensation plans, a Delaware Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust offers several advantages. Firstly, the trust is considered an unfunded arrangement, meaning that the assets held within the trust remain the property of the employer until they are distributed to the employee. This offers some protection in the event of bankruptcy or financial distress of the employer. Furthermore, a Rabbi Trust provides additional security for the executive employees since the trust assets are subject to the claims of the employer's general creditors. This ensures that the deferred compensation funds are safeguarded and cannot be easily accessed by creditors or other potential claimants. Delaware Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust can be customized based on the specific needs and preferences of the employer and executive employees. Some common variations or types of such trusts include: 1. Defined Contribution Rabbi Trust: This type of trust operates on a defined contribution basis, where the employer contributes a specific dollar amount or a percentage of the executive employee's salary to the trust. The contributions are invested, and the eventual benefit is based on the growth of the investments. 2. Supplemental Executive Retirement Plan (SERP) Rabbi Trust: In this trust variation, the employer establishes a supplementary retirement plan for executive employees who may have reached the maximum contribution limits in other qualified retirement plans. The trust is funded with additional employer contributions, often exceeding the limits of traditional qualified retirement plans. 3. Rabbi Trust with Individual Investment Options: Some Delaware Nonqualified Deferred Compensation Trusts offer executive employees the flexibility to select investments based on their risk tolerance and investment objectives. Such trusts allow participants to have a more personalized investment experience within the framework of the trust. Overall, Delaware Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust provides a powerful tool for employers seeking to reward and retain high-performing executives while enabling executive employees to defer and potentially grow their compensation in a tax-efficient manner.
