Retirement Planning - 2 Asset Accumulation Planning Strategies Flashcards
What is a rabbi trust?
A rabbi trust is a trust created to support the non-qualified benefit obligations of employers to their employees
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 the employer makes contributions to a rabbi trust, they cannot retrieve them.
If a company becomes insolvent or goes bankrupt, both the beneficiaries and the company’s creditors have access to the trust’s assets
What is a secular trust?
A secular trust is a type of nonqualified deferred compensation arrangement funded to compensate executive and key employees.
A significant feature of the secular trust is that participants generally have a nonforfeitable and exclusive right to the contributions made to the trust and to the earnings on those contributions.
What is the difference between a rabbi trust and a secular trust?
The money held in a secular trust cannot be reached by an employer’s bankruptcy creditors.
What is a grantor trust?
This means that the assets of the trust are treated as assets of the employer for tax purposes. As a result, no deduction is allowed when the employer contributes funds to the trust and the employer is taxed currently on any earnings on trust assets. The employer is not allowed a deduction until the year in which a participant or beneficiary recognizes income due to a distribution from the trust.
Is a Rabbi Trust treated as a grantor trust? (True or False)
True, Because the assets of a rabbi trust are subject to an employer’s creditors,
What are the disadvantages of a rabbi trust?
Because the assets of a rabbi trust are subject to an employer’s creditors, the trust will be treated as a “grantor trust.”[6] This means that the assets of the trust are treated as assets of the employer for tax purposes. As a result, no deduction is allowed when the employer contributes funds to the trust and the employer is taxed currently on any earnings on trust assets. The employer is not allowed a deduction until the year in which a participant or beneficiary recognizes income due to a distribution from the trust.
Why use a secular trust?
A secular trust can provide your employees with the assurance that their NQDC plan benefits will not be at risk as a result of your refusal (due to a change of heart or change in control) or inability (due to a change in financial condition) to pay the benefits at a future time.
What type of benefit plan is a rabbi trust?
The Rabbi Trust is a non-qualified deferred compensation plan in which funds are invested in an irrevocable trust and held for the benefit of employees for retirement purposes.
Who can be the trustee of a rabbi trust?
The trustee of the trust must be an independent third party that may be granted corporate trustee powers under state law, such as a bank trust department or other similar party.
Who can be the trustee of a rabbi trust?
The trustee of the trust must be an independent third party that may be granted corporate trustee powers under state law, such as a bank trust department or other similar party.
Who owns assets in a rabbi trust?
Because the rabbi trust is a grantor trust and you, the employer, are the grantor, the IRS treats you as the owner of the trust for tax purposes. As a result, you must include the rabbi trust income, deductions, and credits when you calculate your tax liability.
Who funds a rabbi trust?
The employer
Only employer contributions can go into the Rabbi Trust.
This is because a non-qualified deferred compensation arrangement—like a Rabbi Trust—holds a portion of an employee’s compensation to be received at a later date than when the income was earned.
