Rabbi Trusts – first topic in our “Did you know” series
Did you know that the very first Rabbi Trust was, in fact, for a real rabbi?! Legend has it that he had been a great spiritual leader in his synagogue and was getting ready to retire.
What is a rabbi trust?
A Rabbi Trust is a non-qualified deferred compensation plan created as a retirement benefit to employees.
The very first Rabbi Trust
His congregation wanted to bless him by setting up a retirement plan of sorts – a non-qualified benefit plan that he could draw upon as he enjoyed his retirement. Up to that time, most of these plans were a mere promise to pay and monies could be commingled by the employer. The rabbi wanted more security and protection and the idea of the “rabbi trust” was birthed.
The IRS and Private Letter Rulings
However, it was a new idea and dealt with matters of taxation, so the IRS had to review and approve to ensure their idea was sound and to make sure it did not create an immediate taxable event. The synagogue applied for a Private Letter Ruling (PLR) to the IRS, and waited.
The person in charge of the IRS Office of Chief Counsel was a good friend of mine –Tom Brisedine. Tom had a brilliant tax mind and handled all the heavy lifting at the IRS over the 22 years he was there. In 1996, he would join Deloitte & Touche where I was the National Partner in charge of executive compensation and we would work on tons of projects together.. and it was there he would share with me, the story of the Rabbi Trust. Tom would pass in 2015, but his legacy was solid and he was the one behind the approval of that PLR in 1980 (PLR 8113107)… the very 1st Rabbi Trust!
Rabbi Trusts today
Rabbi Trusts are still used with many companies throughout the U.S. –public, private and not-for-profit. They were designed to add additional protection to deferred compensation plans used in executive benefits and compensation. The trust structure cannot be changed by the employer once it has been established. In addition, the funds cannot be commingled by the employer.
Are Rabbi Trusts Irrevocable?
The Rabbi Trust was ingenious – it enables the plan sponsor to irrevocably put dollars into the trust and the dollars can only be used to satisfy the promises made to the executive. Once the executive is paid, if there are any residual dollars in the trust, it can revert to the plan sponsor. In a sense, it operates as a qualified plan trust but is not protected in the event of bankruptcy of the plan sponsor.
Pretty amazing. A rabbi, a synagogue, and his congregation would set the stage for decades to come in executive pay and benefits! Who would have thought!
This is the first topic in our new “Did you know?” series. Stay tuned for a new topic each month. Subscribe to the L-Blast® to receive this and other great articles in your inbox.