Trustees of Rabbi Trusts

[austin3515]

The model Rabbi Trust from the IRS seems to limit TRustees to the following.

"a bank trust department or other party that may be granted corporate trustee powers under state law,"

Does this preclude an individual from service as the Trustee of a Rabbi Trust? I would not think so, but I note that they use the terms "granted CORPORATE trustee powers..."

Also, Do people agree that an individual cannot serve as the Trustee of his own accounts because in so doing he would have constructive receipt of the funds?

 

[Belgarath]

Hmmm - I think your first question is unanswerable without knowledge of the specific state laws. Section 4.03 of Revenue Procedure 92-64 has the same language you reference in the model Rabbi trust:

03. "The trustee of the trust must be an independent third party that may be granted corporate trustee powers under state law, such as a bank trust department or other similar party." I'm dubious that this would permit an individual to have such powers, unless that individual is operating as a corporation?

As to your second question, I'm inclined to disagree. Assuming for the moment that an individual can, under the relevant state law, operate as a Trustee, then it would seem to me that they wear two different "hats" and this would not be considered constructive receipt. But I think this may be moot, depending upon the answer to the above.

Hopefully someone here will have actual experience with such a situation - I've never had to deal with this.

[Peter Gulia]

The provisions and conditions in the 1992 Revenue Procedures set some boundaries for what the IRS would issue a written determination on.  But those conditions do not necessarily set the outer limit for what can be done while getting the desired tax treatment.

 

I’ve seen from big law firms rabbi-trust documents that set up an officer of the employer as the trustee.  But it’s unwise unless the employer or executive has your or another tax practitioner’s advice.

 

Many States’ laws restrict which persons can be in the business of serving as a fiduciary, often limiting it (mostly) to a licensed bank or trust company.  But few of these laws preclude a human from serving as a trustee not as a business and without compensation.

 

I think you’re right to worry about whether a human’s powers as a trustee might give her practical control that defeats an intended deferral.  Which issues are raised, and how strong or weak they are, turns on the particular facts and circumstances.

[Luke Bailey]

I agree with Peter, but as for your second question, austin3515, I have (a) never seen that, and (b) would be hard-pressed to imagine a situation in which the IRS would not, if it were aware of the situation, take the position that the individual had to include the amount in gross income, under the doctrine of constructive receipt or some other theory.

[austin3515]

So you think the Executive Director can be the Trustee of his own account and not have constructive receipt, correct?

 

That's what I had done a few times in the past until and ERISA Attorney spooked me into advising against it.

[Bob the Swimmer]

AUSTIN---

92-64 says "03. The trustee of the trust must be an independent third party that may be granted corporate trustee powers under state law, such as a bank trust department or other similar party." I've never heard or seen (from talking with Cate Fernandez when this was written) that anyone can be trustee of their own account. My understanding is that this derives somewhat from the English common law of Trusts--where an individual can not witness his own will or trust creation. I would not for my clients have them be trustee of their own rabbi trust.

[austin3515]

This is one of those amazing things where it is unbelievable that this obvious question has not been explicitly addressed...

I definitely plan on continuing with the position that the participant should not be his own trustee, because it seems the danger lies down the other path.

[Larry Starr]

22 hours ago, austin3515 said:

This is one of those amazing things where it is unbelievable that this obvious question has not been explicitly addressed...

I definitely plan on continuing with the position that the participant should not be his own trustee, because it seems the danger lies down the other path.

That is clearly the best answer for you and your client!

[austin3515]

Maybe I'm reading too much into your response based on some prior experiences, but I can't help but wonder the reason for your precise choice of words?  Is this not what is best for you and your clients?

[kgr12]

Since a rabbi trust isn't required, in the absence of an institutional trustee, it's often better to have no trust at all. An investment account owned by the tax exempt entity that serves as the point of reference for valuing the participant's account should suffice.

[Bob the Swimmer]

I hear you kgr12 but then there is no protection for the participant from a change of heart or change of control

(but not Ch. 11).

[Larry Starr]

On 12/3/2019 at 3:48 PM, austin3515 said:

Maybe I'm reading too much into your response based on some prior experiences, but I can't help but wonder the reason for your precise choice of words?  Is this not what is best for you and your clients?

Agreed, you are reading too much into my response! ?

IF I had such a situation, the answer would most likely be best for me and my clients. 

Does that help?

 

[austin3515]

It does!

[austin3515]

Reopening this.  This approach ends up being very impractical.  The only logical source for a trustee is a Board member. Board members tend to turnover, and it's a lot of work to change trustees (Several forms, etc).  We're doing this for some clients every couple of years. And then when distributions are needed, it's a lot of work to get these external parties to sign the forms because most brokerages will not accept just any docusign.  And by the way, Board members are not always thrilled to take on this role because they are unpaid volunteers!  .

Are people having the participant/execs serve as trustee based on the position that even if this were to come up somehow, they would not "stick it" to these executives providing vital services to the community?  Caring for the disabled, feeding the poor, and the like?  I feel like in practice this is actually quite common, including with attorney drafted Rabbi Trusts.

[Peter Gulia]

If the employer gets recordkeeping from one of the big providers, ask the recordkeeper whether its captive or affiliated trust company (or the unaffiliated trust company the recordkeeper usually arranges for customers’ § 401(a)-(k) plans’ trusts) is available to serve as a rabbi trustee.

If that service is available, don’t be surprised if the trustee’s fee is more than for a funded plan’s otherwise similar trust. A rabbi trustee budgets for its expenses in responding to, and sometime incurring litigation expenses regarding, other creditors’ claims, including claims asserting that the trustee ought to have stopped payments to deferred compensation participants and beneficiaries and instead preserved the rabbi trust’s assets for all creditors.

If not appointing a bank or trust company, an employer evaluating whether to use a rabbi trust for the employer’s assets might consider whether such a set-aside does much to protect participants and beneficiaries (or the organization). An individual trustee might have too much information about the deferred compensation obligor’s financial condition, possibly triggering conditions under which the trustee must act to preserve the interests of all creditors.

And if the chief purpose of a rabbi trust is to protect deferred compensation obligees from the obligor’s dishonest refusal (while the obligor is solvent) to pay an entitled claim, how likely is it that the organization’s executive will act differently because she is a rabbi trustee than she would act if she were only the organization’s executive?

If an individual asked to serve as a rabbi trustee is an executive of the obligor or has a friendship with some of the people who might have a claim to deferred compensation, one might carefully consider whether conflicting interests could put her in an untenable, or at least unwelcome, situation.

For an unfunded deferred compensation plan, investments (if any) remain the employer’s property. If so, might it be simpler, in some circumstances, for the employer to hold its property without a set-aside?

[austin3515]

First of all the plans I'm using cover a handful of people so no recordkeeper.  Secondly the brokerage account platform we are using requires a Trustee/Rabbi Trust.  I definitely have plans where we have skipped the rabbi trust and just used a corporate account but some execs want the extra protection.

[Peter Gulia]

If no bank or trust company is available to serve and the employer is reluctant to leave a broker-dealer that requires a trustee, the employer sets up a rabbi trust and finds an individual (or a few) willing to accept the trusteeship. And those involved hope no trouble happens.

Further, austin3515 to protect oneself might decline to provide tax advice. Or, might explain the tax risks.