A “rabbi trust” is a nonqualified deferred compensation arrangement that allows churches to set aside funds for an employee’s retirement without immediate tax implications for the employee. These trusts are particularly beneficial for senior pastors nearing retirement, as they permit contributions exceeding the annual limits imposed on traditional tax-sheltered annuities and qualified pension plans.
The Internal Revenue Service (IRS) has provided guidance indicating that contributions made by employers to a rabbi trust are not immediately taxable to the employee, provided certain conditions are met. A key requirement is that the trust’s assets must remain accessible to the employer’s general creditors in the event of insolvency, thereby constituting a “substantial risk of forfeiture.” This stipulation ensures that the funds are not considered constructively received by the employee, allowing for tax deferral until actual distribution.
The case of Bank of America v. Moglia, 330 F.3d 942 (7th Cir. 2003), offers insight into the legal nuances of rabbi trusts. In this case, Outboard Marine Corporation had established a rabbi trust for one of its executives. Upon the company’s bankruptcy, a dispute arose between secured creditors and the bankruptcy trustee over the entitlement to the trust’s assets. The court concluded that, based on the IRS Model Rabbi Trust Agreement, the trust’s assets were subject to the claims of general creditors but not secured creditors. This distinction underscores the importance of precise trust language and the necessity for church treasurers to understand the implications of such provisions.
For churches considering the establishment of a rabbi trust, it is crucial to ensure that the trust complies with IRS guidelines to maintain the intended tax benefits. This includes adopting language from the IRS Model Rabbi Trust Agreement, as outlined in Revenue Procedure 92-64, which specifies that trust assets must be available to satisfy the claims of general creditors in the event of the employer’s insolvency.
In summary, rabbi trusts can be a valuable tool for churches aiming to provide enhanced retirement benefits to their employees. However, careful attention must be paid to the trust’s structure and language to ensure compliance with IRS requirements and to understand the implications for both the church and its employees.
For more detailed information on rabbi trusts and their application within church settings, church treasurers may refer to resources such as the IRS Model Rabbi Trust Agreement and relevant case law, including Bank of America v. Moglia.