A “rabbi trust” is like a cross between a trust and a pension plan, and it’s called a rabbi trust because the first one that ever existed was created to benefit a rabbi. It has nothing to do with rabbis and trust falls, unfortunately, because that’s a fun visual, but...whatever.
Anyway, a rabbi trust is a trust set up by an employer to benefit its employees. And, like a trust, it can’t be touched or modified by anyone other than its beneficiaries (unless the company files for bankruptcy, in which case the trust can be seized to pay debts). Like a pension plan, our employer takes some of our earnings and sticks it in the trust, and then we don’t pay taxes on it until we access the money, typically upon retirement.
Most of the time, rabbi trusts are set up specifically for a company’s executive team, and they exist on top of other employer-provided benefit plans, like 401(k)s. They’re sort of an extra little financial incentive to keep their executives around. Even if the company is acquired, or acquires or merges with someone else, the trust remains untouched and untouchable, which is sometimes not the case with other employer benefit plans.
One thing to note: there’s no tax benefit to the company that establishes a rabbi trust, which is one reason these types of plans are pretty rare.
Another thing to note: if the organization’s net worth falls below a previously determined point, executives aren’t allowed to collect on their trust benefits. Why? Because the IRS thinks that would be a great way for bigwigs to clear out a company’s coffers prior to filing for bankruptcy, and they don’t want that.
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Finance: What is a Pension?31 Views
finance a la shmoop. what is a pension? well it rhymes with tension, and likely
for good reason. if you're a teachers pension or a fireman's pension or [person wearing dark glasses writes something down]
another state employees pension that's backed up by a state that's going
bankrupt. Hi, California, Hi Illinois. well we're looking at you. all right people
well a pension is another term for a retirement fund. but what's special about
a pension is that the employer essentially forces you to put away money
for your retirement and then they invested for you.
how nice. or at least be sure you invest it well on a salary of 75 grand a state [gambling table shown]
employed ditch-digger might get a contribution of say 10 grand a year into
her pension, and that's each year 10 grand of forced savings for as long as
she you know digs ditches for the state. and in some states where the unions are
strong in the governing financial knowledge is weak the government
guarantees a minimum financial return on the pension investment made on behalf of
the employees. that is in California for example the state guarantees a 10% per
year return on their invested pension savings. if the invested return like [equation]
investing it in Wall Street and stocks and bonds and private equity funds and
all that stuff well if that invested return is less than that number less
than that 10%, then the state rights to the pinch and a check to cover the
incremental difference. yeah it's a huge Delta and it's well pretty much why you
a Californian Illinois you're going bankrupt remember. Jesus Saves
but Moses invests. [ Moses, holding stone tablets glares and demands interest]
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