Traditional informally funded Rabbi Trusts vs. Springing Rabbi Trusts

[Guest Mariko]

I recently spoke with a Plan Sponsor who was informally funding a NQDCP with COLI which is owned by the Plan Sponsor. Currently there is no trust. They are interested in putting in a Springing Rabbi Trust. I've never heard of an instance where a sponsor would informally fund an asset held by the company and then set up a Springing Rabbi Trust in which to move those assets upon CoC. My concern would be the lack of protection in the event of Change of Heart. Also, its my understanding that the allure of Springing Trusts lie primarily in the ability to not informally fund until a triggering event - so is there any benefit in setting one up if you have historically informally funded the plan?

Any thoughts on pros/cons of Rabbi Trusts vs. Springing Rabbi Trusts would be greatly appreciated!

[vebaguru]

What would be the purpose of the springing trust? To avoid the loss of deferred comp. benefits in the event of takeover by new owners? That is the usual purpose of a Rabbi Trust. It seems that by the time the trigger event took place, it would be too late to be of any use. The primary value of a Rabbi Trust is that it isolates assets used to fund a DC arrangement, so that those asserts would be protected in the case of the trigger event. An unfunded plan that springs is still an unfunded plan unless the new owners choose to fun it, and then the purpose of the Rabbi Trust has been obviated. Am I missing something?

[Guest Harry O]

Most springing rabbi trusts that I am familiar with become funded, irrevocable, and no longer subject to the claims of creditors upon certain specified events (such as employer financial difficulties short of bankruptcy). The goal is to keep employees one step ahead of creditors. I think there are some serious questions whether these work to defer tax prior to the triggering event but that is what you pay your tax lawyers to figure out. I also believe that the pending legislation in the Congress relating to deferred compensation would outlaw most springing rabbi trusts.

[TCWalker]

I think we're talking about different uses of spinging trusts here: 1) where an empty rabbi trust exists but springs to life and is required to be "funded" upon a change of control by an existing Trust document, (but still informally funding) and 2) where the rabbi trust, after change of control, is both Funded and, somehow. no longer subject to the claims of creditors. (Harry O's post). Marko, I think you're asking about the first type.

In your question scenario it may be the assets within this COLI arrangement are far insufficent to meet plan liabilities and what the springing trust requires is a contribution of assets by the employer follwoing a CoC sufficnet to meet all current liabilities under the plan. So, arguably, the springing trust idea may accomplish two things for the DCP participants in your example upon a CoC event; place the informal funding assets under the control of an institutional trustee and require the plan sponsor to immediately fund the trust with assets = DCP liabilities - informally speaking.

[Vebaguru, the institutional trustee is signed-on long before the CoC takes place and is, in theory, waiting in the wings to make the demand on behalf of the rabbi trust for full (informal) funding when a CoC occurs.]

[mbozek]

What I find amusing about all of these complicated schemes to set up rabbi and springing trust that will be funded before a coc is that they will be revealed to the prospective buyer of the business during negotiations and the purchase price will be adjusted for such obligations. Because the buyer does not want to be responsible for such payments the amounts will be paid before the closing. Also all of the informal funding devices must be subject to the claims of the employer's creditors and funds transferred before bankruptcy can be recovered as a voidable preference or a fraud on the company's creditors.

[Guest Harry O]

In the case of large publicly-traded companies, most of these liabilities have already been expensed and are already reflected on the balance sheet. In theory there is no incremental "cost" associated with funding the rabbi trust (other than the money is coming out of the business and will result in increased borrowing for the employer). I have not seen any purchase price adjustments for these types of things in deals involving large publicly-traded companies. Most of these deals involve high-level due diligence where these arrangements are disclosed but are not usually taken into account by the investment bankers when they come up with a target offer price. At least that has been my experience . . .

[Guest sjb]

Amusing? I think the existence of a rabbi trust in a change of control situation means a good deal to executives that may have deferred compensation. It seems logical(?) that one springing into existence if a change of control occurs might be viewed by participants as the next best thing, particularly if it brings with it an independent fiduciary.