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 Montana 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 an additional means of long-term compensation. This type of trust is commonly offered by companies to attract and retain top-tier executives and provide them with valuable benefits beyond their regular salary. A Rabbi Trust is established in accordance with IRS regulations and allows the executive employees to defer a portion of their compensation until a future designated date. The trust is funded by the employer, who sets aside funds from the executive's salary and bonuses. These funds are invested by a trustee, chosen by the employer, to grow over time and provide greater financial security for the executive in the future. One key advantage of a Rabbi Trust is the tax deferral it offers to executive employees. The portion of the executive's income that is deferred into the trust is not subject to immediate income tax, thereby allowing for potential tax savings. Instead, taxes are paid when the funds are distributed to the executive employee at a later date, usually upon retirement or another agreed-upon milestone. There are a few different variations of the Montana Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust, each of which caters to specific needs and objectives: 1. Voluntary Deferral Trust — This type of Rabbi Trust allows executive employees to voluntarily defer a part of their compensation without any mandatory requirements from the employer. The amount deferred and the distribution dates are determined solely by the executive, granting them flexibility in planning their financial future. 2. Performance-Based Trust — This trust is specifically established for executives whose compensation is tied to performance metrics, such as stock options, bonuses, or commissions. The trust is designed to reward exceptional performance by allowing the executive to defer a portion of their performance-based compensation, ensuring long-term financial stability. 3. Supplemental Executive Retirement Plan Trust (SERP) — A SERP Trust is established to provide additional retirement benefits to key executives. Employers contribute funds into the trust to supplement the executive's pension or other retirement plans, creating a more robust retirement income stream. 4. Key Employee Retention Trust (KEPT) — This type of Rabbi Trust is implemented to retain and incentivize selected key employees who possess critical skills or knowledge that significantly contribute to a company's success. KEPT aims to enhance employee loyalty by deferring a portion of compensation with the promise of deferred payments at a later defined date. Montana Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — Rabbi Trusts offer a way for executives to secure their financial future while bringing added benefits and tax advantages. By deferring a portion of their compensation, executives can ensure a steady income stream after retirement and potentially reduce their current tax liabilities.
