What is a Rabbi Trust?
A rabbi trust is a type of deferred compensation plan that lets employers transfer money into a trust for executives.
How Does a Rabbi Trust Work?
Rabbi trusts were first used to compensate rabbis, which is how they get their name. Employees who havegoing into a rabbi trust on their behalf are not taxed on those amounts until they actually get a check from the trust. This allows the inside the plan to grow tax-deferred.
The trust is irrevocable, meaning the employer can't get the lenders can raid the trust for to repay debts outstanding. Rabbi trusts also aren't allowed to pay out to executives if the company's net worth falls below a certain point. The IRS construes doing this as a way to raid the company before declaring bankruptcy and turning everything over to the creditors. The employer cannot deduct contributions to a rabbi trust on its tax return.back once it it in the trust. However, if the employer goes bankrupt, the company's
Changes in control, such as a merger, generally do not affect the assets in a rabbi trust.
Why Does a Rabbi Trust Matter?
The idea behind a rabbi trust is to ensure that the executivesfulfill their future obligations to the company. They can be supplements to a retirement plan and they can limits on qualified plans. The has very specific rules on what counts as a rabbi trust.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
One of Johnny Carson's greatest characters was Carnac the Magnificent. Clad in a cape and giant feathered turban, the comic great pretended to prophesy the answers to secret questions. The...Read More →
Each week, one of our investing experts answers a reader's question in our InvestingAnswers' Q&A column. It's all part of our mission to help consumers...Read More →