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.
Pennsylvania Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust A Pennsylvania Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, commonly known as a Rabbi Trust, is a specialized financial vehicle that allows employers to provide additional compensation to their executive employees. This trust is established under Pennsylvania state law and is designed to defer the taxation of income until the executive employees receive distributions from the trust. The Rabbi Trust serves as an irrevocable funding vehicle that holds the deferred compensation on behalf of the executive beneficiaries. It provides a significant amount of flexibility for both the employer and the executive employees involved. The trust assets remain subject to the claims of the employer's creditors until they are distributed to the executive employees, offering some protection to the beneficiaries. This type of trust is often used as a tool for executives to save for retirement or other long-term financial goals. Contributions made to the trust are typically made on a pre-tax basis, allowing the executive employees to defer taxation on the income until the funds are distributed at a future date. Taxes are only paid when the trust distributions are made to the beneficiaries, allowing for potential tax savings by deferring income to a later year. Different types of Pennsylvania Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — Rabbi Trust, include: 1. Salary Deferral Trust: This type of trust allows executive employees to defer a portion of their salary into the trust, thereby reducing current taxable income, and instead receive it at a later date. 2. Bonus Deferral Trust: Executives who receive variable compensation, such as bonuses, can defer a portion of these earnings into the trust. This offers them the opportunity to postpone taxes on their bonuses and potentially take advantage of lower tax rates in the future. 3. Severance Deferral Trust: In situations where executives receive a lump-sum severance payment, they can choose to defer it into a Rabbi Trust. This enables them to spread out the tax liability over several years, potentially reducing their overall tax burden. 4. Stock Option Deferral Trust: Executive employees who hold stock options can choose to defer exercising and selling them. By placing them in a Rabbi Trust, they can avoid immediate taxation and potentially benefit from future increases in stock value. The Pennsylvania Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — Rabbi Trust offers a range of benefits for both employers and executive employees. While it allows executives to defer income and potentially reduce taxes, employers can use it as a tool to attract and retain top-level talent by offering additional financial incentives. It is important for both parties to carefully consider the legal and tax implications of establishing and utilizing such trusts. Consulting with legal and financial professionals is highly recommended ensuring compliance with applicable laws and regulations.
