Secured Trust

[Guest Rick Murphy]

Does anyone know anything about a concept being marketed as a "secured trust" From the little I know about it, it appears to be secondary plan or trust that only comes into play if the primary nonqualified plan/rabbi trust cannot pay the full benefit due to insolvency of the employer.

[mbozek]

I reviewed a memo describing a "secured trust" about two years ago but it was short on facts - I remember that memo claimed that the secured turst claimed to get around the requirement that nq benefits be subject to risk of forfeiture by transferrring funds prior to insolvency but I havent any more information.

[Alan Simpson]

Could your “secured trust” actually be a non-qualifed plan with a surety bond?

If so, then to prevent the surety bond from triggering constructive receipt I believe the employee must bear the cost of the bond, not the company, and the company should have no involvement.

That being said, obtaining a surety bond may be expensive and difficult to find.

[mbozek]

my understanding from previous posts is that this insurance is no longer available.

[Kirk Maldonado]

I ran across this concept a number of years ago.

What it was basically an arrangement that converted a Rabbi Trust into a Secular Trust automatically when something happened that threatened the financial viability of the company. Sometimes these arrangements are referred to as a "Rabbicular Trust."

My understanding is that the IRS does not believe that these arrangements work. Specifically, the IRS thinks that employees are subject income taxation on the amounts at the time that they are first contributed to the trust.

[Guest wmacdonald]

I know a lot about the Secured Trust, since our company created it back in 1991. We currently have 20 plans in place, and have had two companies prevailed in bankruptcy court. Since the trust is propriortary, I can give any more information but would speak to you off line.

[Guest wmacdonald]

Originally posted by Kirk Maldonado

I ran across this concept a number of years ago.

What it was basically an arrangement that converted a Rabbi Trust into a Secular Trust automatically when something happened that threatened the financial viability of the company.  Sometimes these arrangements are referred to as a "Rabbicular Trust."

My understanding is that the IRS does not believe that these arrangements work.  Specifically, the IRS thinks that employees are subject income taxation on the amounts at the time that they are first contributed to the trust.

I think your example is of the Rabbicular Trust, which I agree doesn't work. The Secured Trust is much different.

[Kirk Maldonado]

Could you provide a brief description of the difference between a Rabbicular Trust and your Secured Trust?

[Guest wmacdonald]

Originally posted by Kirk Maldonado

Could you provide a brief description of the difference between a Rabbicular Trust and your Secured Trust?

The Secured Trust doesn't convert into anything. It's a third party stand alone trust that has bankruptcy as one of the definitions for COC. The trust has six option letters writen, and as I said earlier two prevailed in bankruptcy. The only purpose for the trust is COC. The only relationship it has with other plans, is an "offset provision" so we don't pay twice.

[Guest EAKarno]

As I see it, the very real risk is that the Service will collapse the two plans/trusts and find that the participants are in constructive receipt since, ultimately, the benefit is not truly at risk of general creditors.

Also, if there is a funded rabbi trust, this would seem to require double funding.

Finally, if you don't watch out, this sort of arrangement could trigger a taxable event by the COC trust from a transaction that really doesn't require it -- i.e., a friendly takeover, merger, spinoff, re-organization etc.

[Guest wmacdonald]

Many of the issue you discribed are covered in the Secured Trust plan. You are right the ERISA issues are of concern, that's why care goes into how it's implimented. On your funding point, no you don't have two plans funding.

[Guest wmacdonald]

I haven't been on in a few weeks, and noticed their was an additional response to questions on the Secured Trust. Eric is right, one of the down sides of the trust is that the DOL could try and say this is a "funded plan" under ERISA, when in fact it's not. The trust doesn't provide any retirement benefits, only COC benefits. Also, the Secured Trust doesn't require you to fund both the Secured trust and a Rabbi, only one. I can tell you that this trust has been looked at by many law firms since 1992, and has currently six options and two companies prevailing in bankruptcy court. It's not for everyone, however if BK is a concern it should be looked at.