The Basics Of Nonqualified Deferred Compensation (Part 4): Rabbi & Secular Trusts
Your company can design your nonqualified deferred compensation (NQDC) plan to use a "rabbi" trust, or in some situations a "secular" trust can be used. Each of these special arrangements has its own advantages, tax treatment, and risks. This article explores the benefits and tradeoffs.
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Key Points in This Article
Your company's use of a rabbi trust or a secular trust adds security to amounts deferred under a nonqualified deferred compensation plan.
A rabbi trust keeps the tax-deferred status of your NQDC and protects the money from changes in corporate control or attitude that would otherwise jeopardize your payouts, but it cannot protect your deferred money in a corporate bankruptcy.
A secular trust protects your deferred amounts from the risks posed by changes in corporate control, changes of corporate attitude toward NQDC, and corporate bankruptcy. However, this security comes at a cost, as your deferred amounts are taxed immediately.
Michael Goldstein is the CEO and President of Summit Alliance Executive Benefits, a Summit Alliance Financial company. Mr. Goldstein has written dozens of articles on the subject of nonqualified plans and co-authored the American Bar Association Real Property, Probate and Trust Law Section’s Life Insurance Counselor book Taxation and Funding of Nonqualified Deferred Compensation: A Complete Guide to Design and Implementation. This article was published solely for its content and quality. Neither the author nor his firm compensated us in exchange for its publication. 
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