A Clifford Trust, sometimes referred to as a short-term trust, is a type of irrevocable trust. Normally, an irrevocable trust cannot be altered, changed, modified, or revoked after a settlor creates it. Clifford Trusts are irrevocable trusts that are set up for at least 10 years and 1 day, where the income from the trust property is paid to a beneficiary, but the property does revert back to the settlor when the trust expires.
When are Clifford Trusts Typically Used?
Clifford Trusts are typically used by parents who want to shelter some investment income. Parents act as a settlor of the trust, and have their children as the beneficiaries. Once the Clifford Trust expires, the trust property reverts back to the parents.
Are Clifford Trusts Allowed Today?
Some courts allow for Clifford Trusts. Others find that Clifford Trusts are ineffective because they defraud creditor's rights to the investment income that is sheltered.
The Tax Reform Act of 1986 changed the investment income shelter a parent can receive from a Clifford Trust. The new "kiddie tax" provision calls for the taxation of the parent's income that exceeds 5% of the Clifford Trust's value.
Do I Need an Attorney for my Trust Issues?
Because of the complex tax issues, it is highly recommended for you to find a tax or estate planning attorney to help you with any trust issues.