Secular Trust

A secular trust is a variation of an irrevocable trust primarily used in nonqualified deferred compensation plans for executives, offering greater security as its assets are not subject to the claims of creditors.
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Definition

A secular trust is a type of irrevocable trust arrangement commonly used in conjunction with nonqualified deferred compensation plans. It is designed to provide executives with enhanced security for their deferred compensation by ensuring that the assets held in the trust are not subject to the claims of the employer’s creditors. This offers more security compared to a Rabbi Trust, where trust assets remain accessible to the employer’s creditors in the event of insolvency.

Examples

  1. Example 1: A company sets up a secular trust to hold deferred compensation for its CEO. The assets in the trust reside separately from the company’s general assets and cannot be seized by the company’s creditors if the company faces bankruptcy.

  2. Example 2: An executive participates in a nonqualified deferred compensation plan funded by a secular trust. Because the assets are protected from the company’s creditors, the executive can be confident they will receive their deferred compensation irrespective of the company’s financial situation.

Frequently Asked Questions (FAQs)

Q: What is the main difference between a Rabbi Trust and a Secular Trust?
A: The primary difference is that while assets in a Rabbi Trust can be accessed by creditors in the event of the company’s insolvency, assets in a Secular Trust are protected from creditor claims, providing greater security to the executive.

Q: What types of plans typically use a Secular Trust?
A: Secular Trusts are typically used with nonqualified deferred compensation plans for executives and other highly compensated employees.

Q: Are there any tax implications for executives with assets in a Secular Trust?
A: Yes, under U.S. tax law, contributions to a Secular Trust are generally considered taxable to the executive when made, as it is considered their beneficial interest is secured.

Q: Can a Secular Trust be revoked once established?
A: No, a Secular Trust is irrevocable, meaning it cannot be revoked or altered once it has been established.

Q: Is there a downside to using a Secular Trust?
A: One potential downside is the immediate taxation of contributions to the trust, which can be less favorable compared to other options that may defer taxation.

  • Rabbi Trust: An irrevocable trust set up to hold deferred compensation for employees. Unlike a secular trust, these trust assets are accessible to company creditors in the event of insolvency.

  • Deferred Compensation Plan: A plan that allows employees to earn wages, bonuses, or other compensation in one period, but receive the payment in a later period, often upon retirement.

Online References

  1. IRS - Nonqualified Deferred Compensation Plans
  2. Investopedia - Rabbi Trust
  3. Thomson Reuters - Secular Trust

Suggested Books for Further Studies

  1. “Executive Compensation Answer Book” by Mitchell M. Feder, who discusses various compensation strategies, including secular and rabbi trusts.
  2. “Employee Benefits Design and Compensation (Collection)” by Bashker D. Biswas, which includes in-depth discussions on executive compensation and trust arrangements.
  3. “Deferred Compensation: Meaning, Definition, and Examples” by Michael McCord, offering detailed coverage of deferred compensation mechanisms.

Fundamentals of Secular Trust: Executive Compensation Basics Quiz

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Thank you for learning with us about secular trusts. We hope you find this information valuable for managing executive compensation and understanding the differences between various trust arrangements. Keep striving for excellence in your financial and executive compensation knowledge!

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