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.
The Hawaii Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, commonly known as a Rabbi Trust, is a specialized financial vehicle designed to assist executive employees in deferring a portion of their compensation for future use. It is primarily used by organizations to provide additional benefits and incentives to key executives, helping them meet their long-term financial goals. This type of trust operates in compliance with Internal Revenue Code Section 402(b), allowing employees to defer a portion of their income on a pre-tax basis. The funds contributed to the trust are then invested and grow tax-deferred until they are eventually distributed to the executive employee. Key Features of Hawaii Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust: 1. Employee Contributions: Eligible executive employees have the option to contribute a percentage of their annual income into the trust, up to the limits set forth by the organization. These voluntary contributions help in deferring income taxes and are deducted from the employee's salary before taxes are calculated. 2. Investment Options: The trustee, typically an independent financial institution, offers a range of investment options where the funds can be invested. These options include stocks, bonds, mutual funds, and other investment vehicles, allowing executives to customize their investment strategy based on their risk tolerance and long-term goals. 3. Tax-Deferred Growth: One of the primary advantages of a Hawaii Rabbi Trust is that the contributed funds grow tax-deferred until they are distributed. This means that any capital gains, dividends, or interest earned within the trust are not subject to immediate taxation, potentially allowing for significant growth over time. 4. Vesting and Distributions: Organizations may choose to establish vesting schedules, dictating when and how employees become entitled to their deferred compensation. Upon reaching retirement or another predefined trigger event, executive employees can begin to receive distributions from the trust. These distributions are generally subject to normal income taxes at the time of receipt. Different Types of Hawaii Nonqualified Deferred Compensation Trusts: 1. Rabbi Trust with Creditor Protection: Some organizations may choose to add an extra layer of protection to their executive employees' deferred compensation. By incorporating specific provisions, such as spendthrift clauses and irrevocable provisions, the trust assets become shielded from potential claims of the organization's creditors. 2. Rabbi Trust with Investment Control: Certain types of Rabbi Trusts allow executive employees to have greater control over investment decisions within the trust. This can include the ability to choose specific investment options or actively manage the assets within the trust, aligning with the employee's personal investment strategies. In summary, the Hawaii Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a Rabbi Trust provides executive employees with a tax-advantaged method to defer a portion of their compensation and save for their future financial needs. With various features and options available, this trust offers flexibility and long-term growth potential while helping organizations attract and retain top executive talent.
