Vested Trusts

Trusts are flexible tools for safely providing the benefits promised under many types of nonqualified deferred compensation plans. Two common types of unfunded trusts are vested trusts and rabbi trusts (discussed elsewhere). Funded trusts are typically referred to as secular trusts (also discussed in a separate section).

A vested trust is an unfunded nonqualified deferred compensation trust in which the executive is not paid any benefits from employer contributions until vesting occurs. Vesting usually is scheduled to occur in conjunction with a specific event, such as termination, takeover, or reaching a certain age.

The executive is generally not taxed on the benefits held in trust until vesting occurs, assuming that the executive's rights are nontransferable and subject to a substantial risk of forfeiture (a fact which should be clearly stated in the trust's vesting provisions).

The employer, as the grantor of the trust, is currently taxed on all vested trust income. The ultimate payment of benefits by the employer, therefore, is includible in the executive's gross income and the employer may generally take a corresponding deduction.