Rabbi Trust Drafting and Design

Summary

This practice note discusses the drafting and design of so-called rabbi trusts. A rabbi trust is a funding arrangement typically used for a company's obligations to make payments under a nonqualified deferred compensation plan (NQDC plan). Because the assets of a rabbi trust are subject to claims of the general creditors of the sponsoring company (generally only in the event of its insolvency), the NQDC plan is still deemed to be unfunded under Internal Revenue Code rules. Consequently, taxation of the compensation obligations under the NQDC plan may be deferred beyond the time that would apply if the plan were actually funded.