Blog


What Is A Rabbi Trust? - What employers and employees need to know

Pipe

What is a Rabbi Trust, and why should I possibly care?  If you are an employer or an employee, then a Rabbi Trust can be a very good way to handle employee benefits.

An employer establishes a Rabbi Trust in order to provide future compensation to employees.  It is a way for the employer to meet its obligations, typically to executives, under a nonqualified benefit plan.  Employees may withdraw money from the trust only after retirement, termination, or disability.  The trust got the name “Rabbi Trust” due to a 1980 IRS ruling concerning a synagogue congregation that set up a fund for its rabbi.  However, these kinds of trusts are widely used in both commercial enterprises and non-profit organizations.


Benefits of Using a Rabbi Trust

The purpose of a Rabbi Trust is to offer security to employees in regard to their nonqualified benefits.  If structured properly, the employee has security protection against an employer’s:

Change of Heart: An employer cannot touch the assets in the trust.

Change of Control: Any unfriendly takeover of the employer’s company will not affect the trust.

However, the employee’s assets are not protected from the claims of the employer’s creditors.  If the employer files for bankruptcy, then the employee stands in line with the other creditors.


Tax Rules

Because the employer’s creditors have access to the Rabbi Trust, the employee does not have complete control of the funds.  As a result, employees have not received the full economic benefit of the fund until they make withdrawals.  For this reason, the IRS requires the employer, and not the employee, to pay income taxes on the trust income.  Contributions to the trust are not tax-deductible.  However, the employer may deduct the full amount of the benefit payment later.


Planning Properly

A Rabbi Trust must be structured properly to allow the employer to use it for deferred compensation, to protect the employee from the employer’s “change of heart” or “change of control,” and to allow the employee to reap the benefits of paying income taxes later.  It is important to pay careful attention to IRS regulations and to any applicable ERISA rules.

Proper planning can help you take advantage of the benefits of a Rabbi Trust.   Be sure to consult your team of qualified tax, legal, and financial professionals for specific guidance.

HighTower St. Louis is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. The team and HighTower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.