The New Congressional Attack on Offshore Rabbi Trusts

Abstract

On July 11, 2002, Chairman Max Baucus (D-Montana) and ranking minority member Charles E. Grassley (R-Iowa), each of the Senate Finance Committee, marked up the Draft National Employee Savings and Trust Equity Guarantee Act (the “NESTEG” Act). On July 11, 2002, Chairman William M. Thomas4 of the House Ways and Means Committee released the Draft American Competitiveness and Corporate Accountability Act (“H.R. 5095”). Both the NESTEG Act and H.R. 5095 contained significant provisions which would make funds held by the beneficiary in offshore rabbi trusts immediately subject to U.S. income tax. The estimated result to the U.S. Treasury Department would be a significant increase in tax collection. Offshore rabbi trusts have become common vehicles for U.S. persons employed abroad by foreign companies to set aside retirement funds. In addition, many offshore hedge fund managers have used offshore rabbi trusts as a means to defer income from current taxation. This article shall discuss the previously proposed legislation, the likelihood of such legislation’s passage in the next Congress and the legal doctrines involved in making such a change in tax policy.