Non-qualified ('rabbi') trusts remain a sound choice to defer compensation

Article Abstract:

A 'rabbi trust' is a type of unqualified deferred compensation plan that is becoming an increasingly popular vehicle for executive deferred compensation plans. The IRS has recently increased the restrictions on the use of such trusts. The purpose of the current policy is to ensure that creditors will be able to obtain trust assets in the event that the employer granting the rabbi trust is bankrupt or insolvent. Rabbi trust agreements should be structured to meet the following requirements: the employer must notify the trustee of any insolvency; the beneficiary cannot act as a trustee; the trustee must have discretionary authority to invest trust assets; the trust assets must be used to satisfy creditor claims in the event of an insolvency; and the creation of the trust must not cause the non-qualified plan to be other than 'unfunded' for the purposes of ERISA.

Compensation and benefits, Executives, Executive compensation, Deferred compensation

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Deferring estate tax payments is a valuable option for closely held businesses

Article Abstract:

Estates that consist largely of closely held businesses or farms can elect to defer federal estate taxes for up to five years under Section 6166 and subsequently pay the tax in installments over 10 years. In addition, a four percent interest rate is available for a portion of deferred taxes for taxpayers using Section 6166. After the initial installment of the estate taxes, the estate must pay the interest on the outstanding tax annually. For an estate to qualify for Section 6166 deferral, more than 35% of the adjusted gross estate must be an interest in a closely held business or farm, and a timely election must be made. In addition, the taxpayer must be sure that timely payment of interest payments are made and that any necessary extensions and filings of supplemental estate returns are made.

Accounting and auditing, Transfer taxes, Close corporations, Closely held corporations

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Temporary Regulations explain when excise tax on excess plan distributions applies

Article Abstract:

The Tax Reform Act of 1986 imposes a 15% excise tax on excess distributions from pension plans made after 1986 and on excess accumulations from estates of decedents who die after 1986. The IRS has issued Temporary Regulations explaining when the excise tax is and is not applied. The tax does not apply to: distributions received by the taxpayer due to the death of another; distributions received by an alternate payee under a domestic relations order; distributions received due to the taxpayer's investment under a plan; distributions that are not included in income because the taxpayer has made a rollover; and nontaxable distributions of medical benefits.

Interpretation and construction, Consumption taxes

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