What is a tax consequence attributed to an off-shore rabbi trust?

The correct answer involves understanding the nature and taxation of offshore rabbi trusts. An offshore rabbi trust is typically used to provide deferred compensation benefits to certain employees while attempting to avoid immediate taxation on the funds set aside in the trust.

With respect to the choices given, tax consequences directly associated with offshore rabbi trusts generally include the treatment of earnings and distributions. In this context, the trust earnings are not tax-free; they are subject to taxation, but not to the trust itself. Instead, they are taxed when distributed to the beneficiaries.

Answer choice C does not reflect a tax consequence. While the trust may have internal rules and regulations governing its operation, it is not a tax consequence in the traditional sense. However, understanding that the consequences mainly revolve around how and when taxes apply to the participants or trust can clarify why this option doesn’t correctly address the taxation implications.

The option that best represents the taxation consequences would point towards either immediate taxation upon distribution or a temporary deferral of tax until the benefits are received, rather than the development of rules and regulations.