Rabbi Trusts

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RABBI TRUST:
Pastor’s Supplementary Retirement Planning Package

“In most cases, Rabbi Trusts pass by unnoticed in the lives of Pastors and is, truly, a hidden gem for Clergy Retirement Planning.” – Joe Cantu, Chief Investment Officer | President

Rabbi Trusts: Background Information

Rabbi Trusts are a specialty for Cantu Tactical Wealth Management charting a course protecting a church for future growth and setting aside additional assets for a Pastors retirement.

Fact: 80% of Pastors in the US retire penniless living on social security.

The Rabbi Trust, as a savings vehicle, is a supplementary compensation package wrapped in a trust allowing contributions to be set aside tax deferred. Assets are only taxable on termination of employment when distributions take place. The Rabbi Trust further serves as a deterrent for the church board ensuring the Pastor does not get hired away by a competitive church much like corporations use as a deferred compensation plan retaining their talented corporate executives.

A Rabbi Trust is an irrevocable trust which may be utilized as a tool for Churches in Pastor retention and for Pastors as a non-qualified deferred compensation plan to supplement their retirement.
A Rabbi Trust is an irrevocable trust and in essence a non-qualified deferred compensation. It is clear that a 403(b)7 or small retirement plan is not enough to retire in today’s economy with runaway inflation and the US continuing to print more money. A church board can ensure the Pastor and other key employees retire comfortably. It serves as a additional benefit to motivate and retain key Pastors from the competition.

Thus, Rabbi Trusts are exempt from requirements of ERISA and a contractual obligation from the church by a separate compensation agreement. Rabbi trust assets are considered an asset of the church and subject to its creditors and the pay-out at retirement must be a series of selected payments. These payments are non-transferable.

Rabbi Trust Benefits For Your Church and Your Pastor

Many churches and charitable organizations are always searching for talented people who can grow their congregation and charities. Corporations protect their talented executives with deferred compensation packages commonly known as “golden handcuffs.” Church Trustees can add these same compensation benefit retention packages for Pastors and key personnel in the form of a Rabbi Trust. In turn, if a competitor church attempts to hire away your Pastor and talent by offering higher pay, benefits and/or a Rabbi Trust, then your congregation is protected. The Pastor and key personnel have to weigh the consequences of walking away from the extra retirement income benefit that has been installed. The Pastor and your key personnel benefit from the retirement nest egg. The Church, the Pastor and all key personnel involved win!

Steps to Determine if the Church and the Pastor are Candidates for a Rabbi Trust

Initial Step:

If the answer is yes for 8 of the 14 following questions, then you are a candidate for a Rabbi Trust.

  • Does the pastor have a 403b retirement plan?
  • Do the church trustees feel the pastor is a key reason the congregation attends?
  • Is the church growing?
  • Do the church trustees feel the pastor is instrumental in congregational giving contributions?
  • Are there other churches or charitable organizations in the pastor’s religious field with higher pay and/or vacancies?
  • Is the cost of living going up in and around the area of the church?
  • Is the pastor within 15 years of retirement?
  • Does the pastor have a growing family?
  • Do the church trustees feel the pastor is captivating, magnetic and ambitious for church growth to the point that a competitive church may recognize the same attributes?
  • Do the church trustees and pastor work together and agree on most issues?
  • Does the church have two or more locations and feel the pastor should be compensated for his work?
  • Does the church have a compensation package that raises the pastor’s salary?
  • Would the church like to attract other talented personnel with greater long term retention?
  • The pastor does not have a rabbi trust deferred compensation plan?

Step 1:

Pastor’s Retirement analysis to determine how much is needed to retire and the Pastor’s retirement target asset number. If no assets are needed, then the Pastor is all set for Retirement. If there will be an asset shortfall, then Step 2.

Step 2:

Contact Joe Cantu for a complimentary conference call with key decision makers and/or Board of Trustees for initial introduction presentation of the basics of “What is a Rabbi Trust?” and “Exploratory questions of the benefits of a Rabbi Trust for all parties involved?”

Once it is determined that a Rabbi Trust provides the solution and is suitable, then move to the Installation Process

Installation Process Meeting:

Step 1:

  • Establish your deferred compensation agreement and your trust agreement between the Church and the Pastor
  • Establish your Trustee, asset custodian and select Cantu Tactical Wealth Management as your portfolio manager for the Rabbi Trust.
  • Understand all costs and fees.

Step 2:

Sign all documents and return to Cantu Tactical Wealth Management.

  • Trust
  • Compensation Agreement
  • Custodial Agreement
  • Investment Management Agreement

Oversight Process:

  • Monitor performance
  • Monitor contributions
  • IRS updates

Cantu Tactical Wealth Management assists you in setting up the Rabbi Trust with a corporate trustee and a custodian and serves as the asset manager. There are standard installation fees for this service and on-going professional fees to maintain the Rabbi Trust to IRS requirements. We are not attorneys or accountants and do not give tax or legal advice. Please read further key risks of tactical active management at bottom of the page.

Call Joe Cantu for more information at (305) 491-0447 or (713) 992-5153 or use the Contact Form.

Rabbi Trusts: Questions and Answers

What is a Rabbi Trust?

A Rabbi Trust is a non-qualified deferred compensation plan set up in an irrevocable trust for Pastors.

Who is allowed to set up a Rabbi Trust?

A Church is allowed to set up a Rabbi Trust for a Pastor or group of Pastors.

What are the advantages of a Rabbi Trust?

Advantages for the Church are that it serves as an additional motivation to retain and protect key Pastors from the competition. It is a deterrent for the Church board ensuring the Pastor does not get hired away by a larger competitive Church able to pay a higher salary.

For years Corporations have used deferred compensation plans to retain their talented corporate executives. There are benefits for both. The company is protected and the executive is ensured a comfortable retirement.

Advantages for Pastors are that it is a key component in preparing and building for retirement. The Rabbi Trust ensures that Pastors and Clergy of any denomination have sufficient assets for a comfortable life in their golden years.

Should Every Pastor establish a Rabbi Trust?

No, if you have sufficient retirement assets. Yes, if there is a retirement asset “shortfall”. It is also an excellent tool to build additional wealth and improve your lifestyle in retirement.

Why are Rabbi Trusts not promoted by financial institutions versus 401k Plans?

The main reason Rabbi Trusts are not promoted by financial institutions is the lack of profitability in these start-up Deferred Compensation Plans. Many institutions only install existing 401k plans of $5 million or more.

Why do financial institutions only accept the larger asset plans?

You see, institutions are paid by a Fee percentage of “Assets Under Management” (AUM) for retirement plans. The larger plans are more profitable and the small plans are more costly and do not generate enough fee income for the institutions. Agents have revenue quotas, as well.

So who gets slighted? Pastors and Clergy get left behind in this key component for retirement asset building.

Are Trustee and Custodial Costs an Issue?

Yes.
Many Trust Companies and Custodians want high annual fees to maintain a Rabbi Trust. These fees can be impossible for many small/median size Churches with new start-up Rabbi Trusts. Again, another reason Rabbi Trusts are not promoted and this hidden gem Retirement Building tool passes by unnoticed in the lives Pastors.

Why do many Pastors go on a speaking circuit after termination of employment?

The answer is to add additional income needed for retirement to offset the shortfall of savings. So many Pastors are obligated to go on the Speaking Circuit to build up more assets because of the lack of income from the 403b plan. It is not possible for all Pastors to participate in the speaking circuit. For example, older Pastors or associate Pastors who have been a good steward to the church may not have the health, desire or charisma necessary to go on the road. Other Pastors understand that they are merely supplementing their income for a comfortable retirement with these road speaking engagements.

Fact: 80% of Pastors in the US retire penniless living on social security. (Christian Chronicle)

What is the solution to establish a Rabbi Trust?

A small firm is the solution in establishing a Rabbi Trust. Small firms have lower overhead and no production quotas for their Investment Advisors and may align themselves with low cost discount Custodians and Trustees.

Cantu Tactical Wealth Management, Inc. is a firm which meets all the above requirements and Pastors are now able to benefit with a new Rabbi Trust in preparing and building for retirement at a low installation and management cost.

Cantu Tactical Wealth Management, Inc. understands there are limitations as to how Pastors can prepare and build assets for Retirement. For example, ordinary people have opportunities of 401k and pension plans, owning a business, buying stock, investing in real estate or other means of building wealth. However, a Pastor with a 7 day work week is limited in his endeavors to create a healthy Retirement savings plan.

There are FIVE (5) primary asset-wealth components available to a Pastor to Prepare for Retirement:
(1) 403B Retirement Plan maximization
(2) Pastor’s Home Allowance maximization
(3) Rabbi Trust
(4) IRA -Spousal
(5) Personal Savings

Now, I will place them in the order of which have the Greatest Potential of asset growth and the reason why.

(1) Rabbi Trust No limit on compensation package Non-Taxable during employment
(2) Savings No limit on the amount Saved Taxable during employment
(3) Home Allowance Limited by “COLA” and pay Non-Taxable during employment
(4) 403B Plan Limited by compensation Non-Taxable during employment
(5) IRA – Spousal Limited by IRS requirements Non-Taxable or Taxable on Contribution

In conclusion, as you can see the Rabbi Trust is the Pastor’s strongest most important asset-wealth component for building and preparing for Retirement.

Why is a Rabbi Trust the most important component in a “Pastor’s Retirement Savings Plan”?

A Rabbi Trust does not have compensation limits such as a 403b Plan.

Rabbi Trusts are exempt from requirements of ERISA. (See below ERISA and Rabbi Trusts)

It is clear that a 403B is such a small retirement plan with inadequate contribution limits necessary to accumulate enough to retire in today’s economy and unsatisfactory for a future lifestyle with expected rising inflation. A church board can ensure the Pastor and other key employees retire comfortably by installing a Rabbi Trust.

A Rabbi Trust provides a supplementary compensation package necessary to build for a comfortable retirement.

How Does Cantu Tactical Wealth Management, Inc. help install a Rabbi Trust?

a. The most important aspect about our firm is that we are a Fiduciary Independent Investment Adviser Firm and we take you and the Board through a Step-by-Step process to install the Rabbi Trust.

b. The “First Step” is to determine the assets needed to maintain your comfortable Retirement Lifestyle. We first perform a complimentary Retirement analysis to find “Your Retirement #” of the amount of assets needed to achieve your desired reasonable Retirement lifestyle.

c. This analysis determines if you will achieve your target goal based on current assets, future contributions and other factors. If there is not an asset shortfall, then a Rabbi Trust is not necessary. However, you still may install a Rabbi Trust if you would like to raise your standard of living in retirement compared to your current lifestyle.

d. If there is an asset shortfall to be made up for Retirement, then we need to get to work and move on to the “Second Step” of the exploratory aspects of creating a compensation package to achieve your retirement target. Aspects may include many Church and individual factors such as Church budgets, timing, “Assets” needed, savings, social security and target retirement expectation dates and many others. There are several issues, but our process makes it simple and smooth.

e. “Step 3” process. We, then, present the benefits to all parties involved and negotiate with the Board of Trustees/Directors on behalf of the Pastor to install a Rabbi Trust with the supporting compensation package necessary for a reasonable Retirement.

f. This process includes all educational presentations, documents and required business partners such as the Trustee firm and the Custodian. Our firm is the Asset Management Firm of the Rabbi Trust and Cantu Tactical Wealth Management has the experience with published performance results on Morningstar Performance Data Company.

g. We believe this is a “win-win” benefit for both the Church and the Pastor(s).

h. Optional: If your Church is large enough and would like to explore the possibility of a “Tenure Program”, then we can make suggestions to the Board of Trustees/Directors/Elders for this program.

What documents are involved in setting up a Rabbi Trust?

(1) Rabbi Trust document
(2) Trust Company engagement document
(3) Compensation agreement is required between the Pastor and the Church.
(4) Custodial account document
(5) Asset Management Firm agreement to have the assets managed instead of sitting in cash.

Who are the Key entities involved in setting up a Rabbi Trust?

A Trust Company serves as the Trustee for the Rabbi Trust. The Church is the grantor of the Rabbi Trust. The Pastor is the beneficiary of the trust. The Custodian (financial institution) holds the assets of the trust. And a money management firm is engaged to manage the assets of the trust.

What are peculiarities of Rabbi Trusts versus other Retirement Plans?

a. Rabbi Trusts are exempt from requirements of ERISA. ERISA governs and protects qualified retirement plans and ensure they are nondiscriminatory and fair for both highly compensated employees and non-highly compensated employees.

b. Since a Rabbi Trust is exempt from ERISA Requirements then the Church can install a Rabbi Trust which can be discriminatory and compensate only the Pastor(s) as Key employees. This is exactly what corporate America does for their Key talented employees.

c. A Rabbi Trust has to have a Trust Company provide oversight. Other retirement plans such as 401k’s and 403B’s are not required to have a Trust company for oversight.

d. A Rabbi Trust has to have an additional Compensation agreement negotiated and in place. Other retirement plans do not have compensation agreements.

e. A Rabbi Trust typically has a vesting schedule just as 401ks. Many types of other retirement plans, such as a 401k or pension plan, have a vesting schedule.

f. A Rabbi Trust is required to pay out the assets in a series of payments upon termination of employment. Other retirement plans are not required to pay out the assets upon retirement.

g. Other qualified employer sponsored plans are not available to Pastors. Only the 403B plan is available to the Pastor and very limited to the contributions.

h. A Rabbi Trust is not a qualified plan, but employer sponsored nonqualified deferred compensation plan.

i. A Rabbi Trust is not limited to the compensation requirements of ERISA such as other retirement plans.

j. Rabbi trust assets are considered an asset of the church and subject to its creditors.

k. Assets of the Trust are paid out at retirement in a series of selected payments. These payments are non-transferable to beneficiaries except delineated by the trust document.

What Tax and ERISA Regulations pertain to Rabbi Trusts?

ERISA and Rabbi Trusts
The Department of Labor (DOL) does not consider a Rabbi Trust as a “funded” plan for ERISA Purposes. ERISA (Employment Retirement Income Security Act)

IRS and Rabbi Trusts
Since the Rabbi Trust assets cannot be used for the benefits of the Pastor while he is employed and the assets are subject to the claims of creditors of the Church, then the assets are not taxable to the Pastor at the time of their employment.

The assets are taxed only at the time of the distribution to the Pastor, which is typically termination of employment. (Retirement)

If the Pastor has access to the funds once they are vested, then the assets could be taxable. If there are restrictions on the Pastor’s ability to receive their benefits then there is no IRS “Constructive Receipt” (IRC 83).

IRS Positions on Rabbi Trusts
The IRS stated in “REV Proc 92-64” a model for a rabbi trust that is serves as a “Safe Harbor” for Churches and Pastors related to nonqualified Deferred compensation Plans. The Code states that if this model trust is used then the Pastor and Church will not be in “Constructive Receipt”.

The IRS has released Procedures REV. Proc. 71-19 and Rev. Proc. 92-65 which provides the guidelines in the Rabbi Trust Plan.

Joe Cantu Background

Joe Cantu is a “Retirement & Estate Asset Manager” and has 28 Years of experience in the wealth management business since 1988. He has worked for three of the largest Wall Street Firms, Smith Barney, Morgan Stanley and Merrill Lynch as a Portfolio Manager. He formed the Cantu Tactical Wealth Management in 2009 (7 years ago). His expertise as a Portfolio Manager has provided Retirement and wealth strategies for High Net Worth investor’s individuals, Pastors and corporate executives in the retirement plans area, such as Defined Benefit Plans, Charitable Foundations, Rabbi Trusts, 401k Rollovers, IRAs and Tax Free Municipal bond investments. Joe holds a Masters Degree in Business Administration from Boston University and a Bachelors Degree in Engineering from West Point, NY, US Military Academy with a concentration in Economics.

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