IRS Rules on Stock Ownership in Rabbi Trust

October 6, 2000 ( - The Internal Revenue Service says that a parent company's contribution of stock to subsidiary in a so-called rabbi trust has not changed hands until it has actually been used to satisfy claims of the subsidiary, either to participant/beneficiaries or creditors of the subsidiary, as long as certain conditions are satisfied.

Rabbi trusts are grantor trusts established to provide future benefits to employees. 

Yesterday the IRS issued Notice 2000-56 that said a parent company will be considered the grantor and owner of parent company stock held in a subsidiary’s rabbi trust if:

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  • the contribution is meant to assist the subsidiary in meeting its deferred compensation obligations,
  • the parent stock is both subject to the claims of creditors of the parent corporation and
  • that any parent stock not transferred to the subsidiary’s employees will revert to the parent company on termination of the trust.

The IRS said the result would be the same even where the parent stock is subject to the claims of the creditors of the subsidiary, according to BNA Pension & Benefits Daily.

Under those circumstances the parent stock will not be considered transferred to the subsidiary until:

  • actually used to satisfy the subsidiary’s deferred compensation obligation to employees or service providers, or
  • a claim is made against the trust by a creditor of an insolvent subsidiary.

The IRS will rule on requests submitted under Revenue Procedure 92-64, which contained grantor trust language for use in rabbi trusts, where the model language for a rabbi trust has been modified to reflect the notice’s terms, according to BNA.

The notice also provided transition provisions for existing rabbi trusts.

Notice 2000-56 will appear in Internal Revenue Bulletin No. 2000-43, dated Oct. 23, 2000.

– Nevin Adams