A rabbi trust is an effective way to reward and incentivize employees. It is essentially a trust fund created by a business for the benefit of its employees, usually in the form of deferred compensation or a supplemental retirement plan. With this type of trust, the employer sets aside funds to be held in trust for the benefit of the employee and not liable to creditors in the event of bankruptcy.

A rabbi trust works by essentially setting a limit on the amount of money an employee can collect from the trust in a given year, regardless of their employment status with the company. This is usually set out in an agreement between the employer and the employee, and outlines the terms for payment and withholding.

The most common use for a rabbi trust is to provide additional income for employees in retirement. By contributing to a rabbi trust, employers can not only give employees a more secure retirement, but can also provide them with a greater tax-sheltered opportunity than if they had used a traditional retirement plan. Moreover, this benefit can be used to encourage employees to stay with the company for the long-term.

One important thing to note about a rabbi trust is that it does not protect the contributions made by the employer or those made by the recipients of the trust from creditors in the event that the company files for bankruptcy or is unable to pay its debts. In such a situation, creditors would have the right to claim some or all of the funds held in the trust.

Ultimately, a rabbi trust is an important tool that employers can use to ensure their employees are looking after in the event of retirement or termination. It creates a powerful incentive for employees to remain with the company for the long-term and can ensure that their retirement savings are secure and protected, regardless of the economic situation.