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.
A South Dakota Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, commonly referred to as a Rabbi Trust, is a financial vehicle designed to provide certain tax advantages for executive employees in relation to their deferred compensation plans. This unique trust arrangement originated from a 1980 case involving a rabbi, which established the legal framework for such a trust. Key Features of a South Dakota Nonqualified Deferred Compensation Trust (Rabbi Trust): 1. Tax Advantages: By utilizing the structure of a rabbi trust, executive employees can defer their compensation without immediate taxation. The funds are not taxable until they are distributed or made available to the employee in the future. 2. Employer Contributions: Employers typically make contributions to the trust, which are held and invested on behalf of the participating executive employees until they become eligible for distribution. 3. Employee Eligibility: These trusts are primarily established for the benefit of top executives or other highly compensated employees who have exceeded the limits of qualified retirement plans such as 401(k)s or pensions. 4. Investment Options: Trust assets can be invested based on the preferences and risk tolerance of the employee. Typically, the trust will offer a range of investment options such as stocks, bonds, mutual funds, and other investment vehicles. 5. Vesting Schedule: The trust may have a vesting schedule, which determines when the employee will have full ownership and control over the funds contributed by the employer. This incentivizes loyalty and retention of key executives. 6. Distribution Timing and Options: The trust can provide flexibility regarding when and how distributions are made to the executive employee. For instance, participants may choose to receive a lump sum payment or structured periodic payments over a specified duration. 7. Creditor Protection: Assets held within the trust may be shielded from potential creditor claims in the event of bankruptcy or legal disputes involving the employer. Types of South Dakota Nonqualified Deferred Compensation Trusts: While the core concept of a South Dakota Nonqualified Deferred Compensation Trust remains the same, different variations can exist depending on the specific objectives and preferences of the employer. The trust might be tailored to accommodate different conditions such as performance-based compensation, stock options, or supplemental retirement income. Therefore, various named types could be based on their individual characteristics, although the general structure and tax benefits remain similar. In conclusion, a South Dakota Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust, offers tax advantages and flexibility for executive employees in regard to their deferred compensation plans. This unique trust arrangement can help employers retain key talent and provide additional benefits to their top executives.
