Types of Trusts Used for Paying Benefits Under a Nonqualified Deferred Compensation Plan
Rabbi trusts and Secular trusts are examples of trusts an employer may establish to pay nonqualified deferred compensation benefits.
Employers use various approaches for paying benefits under a nonqualified deferred compensation plan. Among the most frequently used are rabbi trusts and secular trusts, along with corporate owned life insurance (COLI), unrestricted assets, and split-dollar life insurance.
Attorney Barry K. Downey, along with Attorneys Michael P. Connors, and Henry A Smith III, Smith & Downey, P.A., have authored the tenth edition of the Nonqualified Deferred Compensation Answer Book. We are privileged to share their comments on rabbi and secular trusts below.
What types of trusts can an employer establish to fulfill its promise to pay deferred compensation?
There are two basic types of trust that may be used by a single employer, acting alone, to fulfill its promise of paying deferred compensation to an employee or independent contractor.
- Rabbi trust. This generally is an irrevocable trust that is established for the benefit of the participant, that is beyond access by the employer, but that is subject to the claims of the employer’s general bankruptcy and insolvency creditors.
- Secular trust. This generally is an irrevocable trust that is established for the benefit of the participant, that is beyond access by the employer, and that is protected from the employer’s (but not necessarily the participant’s) bankruptcy and insolvency and other creditors.
Although several bills considered from time to time by Congress would have had a negative effect on rabbi trusts, currently there does not appear to be a legislative threat to the use of rabbi trusts in connection with nonqualified plans.
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