What is a Rabbi Trust?

A rabbi trust is a type of trust that is used in order to provide benefits to employees on behalf of a company. This type of trust is referred to as a rabbi trust because it was initially used for the first time by a rabbi and his congregation. This type of trust is commonly used with the executives of a company in order to provide them with additional benefits on top of the normal benefits package.

Rabbi Trust

The trust is set up as an irrevocable trust arrangement. This means that once the employer sets up the trust and puts assets into it, they cannot go back and get the assets in the future. They cannot change anything about the trust once it is set up. The beneficiaries of the trust are the only ones that can access the funds or change any of the terms. 

Security

The primary reason to set up a rabbi trust is to provide security for the employees that get to participate in it. When a company sets up a non-qualified benefits plan without the use of a rabbi trust, the company could potentially change the terms at any point. They could take the money back out of the plan if they needed to. However, when a rabbi trust is used, it provides the employees with security because none of the terms can be changed.

One of the unique features of this type of trust is that it is not protected from creditors. With many other types of trusts, creditors do not have access to the funds if a company becomes insolvent. With the rabbi trust, if the company goes out of business, both the employees and the creditors of the company will go after the funds in the trust.

This type of trust really provides two types of security for the employees involved. They are protected against the company changing its mind and they are protected against a change to the plan if another company takes over. Even if a hostile takeover occurs, the funds in a rabbi trust will remain untouched.

Tax Benefits

One of the primary benefits of this type of trust is that it provides tax advantages to the employees. When an employer puts money into a rabbi trust on behalf of the employees, it does not count as income for the employee. The money can accumulate in the rabbi trust and they do not have to pay any taxes on it. The employees only have to start paying taxes when they take money out of the rabbi trust. This makes it similar to a qualified retirement plan, but it is set up in a non-qualified manner. 

These types of investment tools are rare because many companies do not use them. There is no tax deduction benefit to a company, so many companies prefer to use other types of investment tools.