The Rabbi Trust: a Unique Way to Defer Compensation
| Publication year | 1987 |
| Pages | 614 |
1987, April, Pg. 614. The Rabbi Trust: A Unique Way to Defer Compensation
A corporate executive desiring to defer compensation into a later year is caught on the horns of a dilemma. If the executive's employer funds the deferred compensation arrangement,(fn1) the executive might be subject to federal income taxation in the year the arrangement is funded, even if distributions from the fund are not received until many years later, pursuant to the twin tax accounting doctrines of "constructive receipt" and "economic benefit." Such a result places the executive in the worst of all worlds: the incidence of a tax without receipt of the cash to pay for it. On the other hand, if the deferred compensation arrangement is funded, the executive runs the risk that when the day comes for payment under the plan, there will be no funds to pay. This can occur because of the intervening insolvency of the employer or because of a change in corporate control, resulting in the inability or unwillingness of new mangement to pay.
This article discusses the "rabbi" trust, a little-used deferred compensation arrangement that has been available since 1981. If properly structured, the rabbi trust affords an executive the ability to have a funded deferred compensation arrangement that is taxed to the executive only in the years in which distributions are received. This circumvents the doctrines of economic benefit and constructive receipt and minimizes the risk that there will be no funds available when payment is due.
The rabbi trust derives its name from the initial private letter ruling ("PLR")(fn2) issued by the Internal Revenue Service ("Service") which involved a rabbi and his employer, the congregation. The congregation proposed to establish an irrevocable, funded trust with the rabbi as sole beneficiary. Income from the trust would be paid quarterly, with principal payable upon the death, disability, retirement or termination of the rabbi. The rabbi's interest in the trust was not prior to distributions and was not assignable by him or otherwise subject to the claims of his creditors.
The key provision of the trust was that the assets of the trust estate were subject to the claims of the employer (the congregation) as if the assets were the general assets of the employer. In ruling that this arrangement did not require the immediate inclusion in the rabbi's income of the funded trust, the Service addressed the related issues of...
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