What Is a Rabbi Trust?

A rabbi trust is a type of trust created by employers to support non-qualified benefit obligations to their employees. A rabbi and his congregation first used this type of trust after an Internal Revenue Service (IRS) private letter ruling approved its use; it has been referred to as a rabbi trust ever since. Essentially, it’s a non-qualified employee trust designed to benefit both the employer and the employee.

Understanding Rabbi Trusts

A rabbi trust creates security for employees because the assets within the trust are outside the control of employers; they are typically set up to be irrevocable. In other words, once tꦇhe employer makes contributions to a rabbi trust, the🥀y cannot retrieve them.

A significant drawback of rabbi trusts is that they don't protect against creditors. If a company becomes insolvent or goes bankrupt, both the beneficiaries and the company’s creditors have access to the trust’s assets. For example, if a rabbi trust has $500,000 worth of stock and cash in it, both the creditors and 🌼beneficiaries would go after those assets.

Rabbi Trust Protection

A rabbi trust protects employees from a company that is experiencing financial hardship and wants to remove some of the trust’s asset✤s to meet its other obligations. For example, an employer cannot withdraw $50,000 from a rabbi trust to pay employee wages. A rabbi trust’s structure cannot be changed by the employer once it has been established, giving further protection to its bene🦩ficiaries.

Rabbi Trust Taxation

A rabbi trust provides tax advantages for employees. Contributions made to the trust do not count as part of the employee’s wages. For example, if an employee receives an annual income of $100,000 and his or her employer makes monthly contributions of $1,000 to the staff member’s rabb💖i trust, their taxable income is $100,000; they do not have to pay tax on the𒁏 $12,000 of contribution payments.

Rabbi trusts allow employees’ assets to grow without them having to pay tax on any gains until they withdraw their money. In this sense, a rabbi trust is similar to a qualified 澳洲幸运5官方开奖结果体彩网:retirement plan. A rabbi trust does not provide any tax benefits for companies that make its use limited compared to 澳洲幸运5官方开奖结果体彩网:other types of trusts.

The Bottom Line

A rabbi trust can be a useful tool for employers offering additional benefits to employees, particularly senior executives. It offers employees tax advantages and some protection against employer financial difficulties. However, it doesn’t shield assets from creditors if the company goes bankrupt, making it less secure than other types of trusts