Clifford Trust Lawyers

Where You Need a Lawyer:

(This may not be the same place you live)

At No Cost! 

 What Is a Trust?

Trusts are estate planning tools that are used to help individuals organize their wealth and spending needs and provide for the needs of others. The creator of a trust is called the grantor.

A grantor also creates the rules for the trust according to legal guidelines, which may vary by state. In general, trust creation begins when a grantor determines that they want to put certain assets in a trust for the benefit of another individual, referred to as a beneficiary.

A third individual, referred to as a trustee, is designated to manage the trust. The trustee may be the same individual as the grantor.

However, the trustee is typically another individual. There are certain requirements or restrictions that a grantor can place on beneficiaries that they must satisfy before accessing the trust, including the following:

  • At what age
  • How often; and
  • How much money they are allowed to withdraw at one time.

What Are the Different Kinds of Trusts?

An individual may create many different types of trusts, including revocable and irrevocable trusts. Revocable trusts may be altered or revoked by a grantor after they are created.

In contrast, irrevocable trusts cannot be changed once they are created. An express trust is a trust that is intentionally and deliberately created.

There are two categories of express trusts, lifetime or inter vivos trusts, and testamentary trusts. Inter vivos trusts are set up during a grantor’s lifetime or settlor.

Testamentary trusts precede the settlor’s death. The type of trust that an individual creates will depend on several different factors, including the needs of the grantor and the basic purpose for the trust creation. Common types of trusts include:

The choice of trust type largely depends on several factors, including the needs and desires of the grantor as well as the basic purpose for the transfer. Examples of the more common types of trusts include:

  • Bypass trusts: Bypass trusts are also referred to as family trusts, or marital trusts. It is generally intended to help married couples most efficiently manage the expense of estate tax.
  • Special needs trusts: Special needs trusts serve disabled people who are not able to earn their own living because of their disabilities or illnesses.
  • Spendthrift trusts: Spendthrift trusts are created to control how the beneficiary uses the funds in the trust. For example, when the trust creator believes that the beneficiary will not be able to manage the funds themselves.
  • Life insurance trusts: These trusts help beneficiaries avoid estate taxes, and other costs that a life insurance policy would generally require.

Many other types of trusts may be available. For example, a Clifford Trust.

What Is a Clifford Trust?

Trusts involve a fiduciary legal relationship. One party, the trustee, holds the legal title, or legal ownership with the right to control the trust assets.

The trustee holds the legal title to these trust assets on behalf of the beneficiaries of the trust. Trust assets may include the following:

  • Cash
  • Stocks
  • Other types of real or personal property.

The beneficiaries of the trust hold equitable title to the trust.

Having an equitable title means the individual has the right to use or benefit from that property. For many years, Clifford Trusts were popular.

Clifford Trusts were popular because they could be used as tax shelters. Tax shelters are mechanisms used to avoid paying taxes.

How Did the Clifford Trust Operate?

The term Clifford Trust comes from a United States Supreme Court decision, Helvering v. Clifford, which was decided in 1940. A Clifford trust is created by a grantor or individual who funds the trust.

The grantor places res, which is money or property, into the trust. The trustee manages this res on behalf of a beneficiary.

Previously, a grantor created a Clifford trust by setting up and funding the trust to last for at least ten years and one day. The trust can allow a settlor, who is usually in a higher tax bracket, to pay income to an individual, or beneficiary, who is usually a child, in a lower tax bracket.

The income that was received by a beneficiary was income that was earned from investments or investment income. As long as the trust existed, the investment income was charged at the tax rate paid by the beneficiary and not the grantor.

As a result, the trust income would be tax-sheltered. Tax-sheltered means it would receive advantageous tax treatment.

The advantageous tax treatment applied as long as the trust income was not spent on basic childcare needs that the grantor was legally required to supply. A Clifford Trust was irrevocable for as long as it lasted.

When the trust expired, the trust income was immediately returned to the grantor. If this occurred, the income would be taxed at the grantor’s tax rate.

What Is the Kiddie Tax?

With the Tax Reform Act of 1986, Congress required that the income from a Clifford Trust be taxed to the grantor. Federal laws contain a kiddie tax provision.

Under the kiddie tax provision, trust investment income is classified as unearned income for the child. As of 2020, the kiddie tax applied to any investment income exceeding $2,200.

If, for example, there is $3,000 of unearned investment income, $1,000 would be subject to the kiddie tax. The kiddie tax is taxed at the grantor’s marginal federal income tax rate.

This rate may go up as high as 37% for ordinary income and short-term capital gains. The rate may also go up to as high as 20% for long-term capital gains and dividends.

Are Clifford Trusts Still Used?

Clifford trusts are not frequently used anymore as a result of the elimination of the tax incentives that existed for creating a Clifford trust. Now, a grantor trust is used more frequently than a Clifford Trust.

Like a Clifford trust, a grantor trust gives the grantor significant control over the trust assets. In addition, the investment income is taxed to the grantor at their individual tax rate, as opposed to the trust tax rate.

Because tax rates for individuals are often lower than those applied to trusts, a grantor trust may offer advantageous tax treatment, just as a Clifford trust used to.

A grantor trust provides the grantor with the flexibility to change the following trust:

  • Beneficiaries
  • Assets
  • Investments

In addition, the grantor may give up their control of the trust at any time. If that occurs, the trust will become an irrevocable trust.

Once a trust becomes irrevocable, the terms generally cannot be changed, added to, or deleted. In addition, the trust itself pays taxes on investment income instead of the grantor or the beneficiaries.

Do I Need an Attorney for Help With Trust Creation or Modification?

If you are interested in creating a trust or need to modify the terms of an existing trust, it is important to consult with a trust attorney. Your attorney can assist you with creating a trust and, if necessary, modifying the terms of the trust.

Your attorney will also be able to assist you with any trust taxation issues that may arise. A lawyer can help ensure that the trust receives favorable tax treatment to the extent the law allows.

Save Time and Money - Speak With a Lawyer Right Away

  • Buy one 30-minute consultation call or subscribe for unlimited calls
  • Subscription includes access to unlimited consultation calls at a reduced price
  • Receive quick expert feedback or review your DIY legal documents
  • Have peace of mind without a long wait or industry standard retainer
  • Get the right guidance - Schedule a call with a lawyer today!

16 people have successfully posted their cases

Find a Lawyer