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 Virginia Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees, commonly known as a Rabbi Trust, is a sophisticated financial arrangement that allows employers to create a deferred compensation plan for their executive employees. This type of trust provides a tax-efficient way for executives to defer a portion of their compensation until a later date, typically retirement. The Virginia Nonqualified Deferred Compensation Trust is specifically designed to comply with the requirements of section 409A of the Internal Revenue Code, which governs deferred compensation plans. By setting up a trust, employers can ensure that the deferred compensation funds are segregated from the company's assets and protected in case of financial distress or bankruptcy. Employees participating in a Virginia Nonqualified Deferred Compensation Trust can contribute a portion of their pre-tax income to the trust, which will be invested according to their investment preferences. These contributions are not subject to current income tax and will grow tax-deferred until distributed to the employee. Upon retirement or another triggering event, the executive employees can start receiving distributions from the trust. These distributions can be structured according to the employee's preferences, whether as a lump sum or periodic payments over a period of time. In most cases, these distributions are subject to ordinary income tax in the year of receipt. It's important to note that there are different types of Virginia Nonqualified Deferred Compensation Trusts for the Benefit of Executive Employees, each with its own specific characteristics: 1. Traditional Rabbi Trust: This is the most commonly used type of rabbi trust. It allows executives to defer a portion of their compensation, which is then held and invested in the trust until distribution. 2. SERP Rabbi Trust: This type of trust is often used in conjunction with a Supplemental Executive Retirement Plan (SERP). The trust holds the deferred compensation funds and ensures their availability when the executive retires or reaches a specific retirement age. 3. Split Dollar Life Insurance Rabbi Trust: In this variation of the rabbi trust, the deferred compensation funds are used to fund a life insurance policy on the executive's life. The trust holds the policy and pays the premiums, and upon the executive's death, the policy's proceeds are used to repay the trust for the deferred compensation funds. 4. Escrow Rabbi Trust: This type of trust is used in specific situations where immediate tax benefits are desired. The deferred compensation funds are placed in an escrow account until specific events occur, such as a change in control of the company or the executive's employment termination. Overall, a Virginia Nonqualified Deferred Compensation Trust for the Benefit of Executive Employees — a RabbThusus— - offers a comprehensive and flexible solution for executives to defer and manage their compensation while providing important tax advantages. It provides peace of mind to both employers and employees by ensuring the protection and growth of these funds until distribution.
