New IRS position on taxation of secular trust's income.

• Author: Josephs, Stuart R.
• Position: Brief Article

An employee covered under a nonqualified deferred compensation plan may wish to employer to "fund" his benefits by having the employer transfer assets to a trust.

If the trust's assets are available to the employer's creditors, the employee is not currently taxed on the employer's contributions to the trust or on the income earned by the trust on these contributions. This type of trust is known as a "rabbi trust."

On the other hand, if the trust's assets are not available to the employer's creditors, the employee generally is currently taxed on the employer's contributions to the trust. This type of trust is known as a "secular trust."

IRS Letter Ruling 8841023 held that a participant in a secular trust was the trust's grantor. Therefore, the participant was treated as the owner of, and currently taxed on, the trust's income, since such income would be distributed to, or accumulated for, the participant (Sec. 677(a)(1) and (2)). Consequently, distributions of this income would not be taxed again to the participant.

However, an employer recently requested a ruling that the employer was a secular trust's owner to avoid taxing the participant on the trust's income.

In rejecting this request, IRS...