Rabbi Trust

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.