Clifford trust
Noun: A specific type of trust arrangement, now largely obsolete due to changes in U.S. tax law, where income generated by the trust's assets is distributed to a beneficiary (typically in a lower tax bracket) for a fixed period of at least 10 years, after which the principal assets revert to the original grantor.
A clifford trust is a legal and financial term. It is used in contexts discussing estate planning, taxation, and historical financial instruments. * The primary purpose of a clifford trust was to reduce a family's overall tax burden by shifting investment income to a child or another relative with a lower income tax rate. * It is a proper noun, often capitalized as Clifford Trust, named after the court case that established its principles.
- Noun:
- Before the tax reform, setting up a Clifford trust was a common strategy for parents to pay for a child's college education with pre-tax dollars.
- The attorney explained that a clifford trust must last for a minimum of ten years and a day for the income shift to be recognized.
- Changes in the tax code in the 1980s rendered the traditional clifford trust ineffective for new estate plans.
- Historical/Legal Context: The term is primarily used in historical or explanatory contexts regarding U.S. tax law. The Tax Reform Act of 1986 eliminated the tax advantage of Clifford trusts by attributing the trust's income back to the grantor for tax purposes in most cases.
- Modern Equivalent: While the classic clifford trust is obsolete, its purpose is served by other modern instruments like Section 2503(c) minor's trusts or 529 college savings plans, which have their own specific rules and tax treatments.
- Grantor Trust (n): A broader category of trusts where the grantor retains certain controls or benefits. Post-1986, most clifford trusts would be classified as grantor trusts for tax purposes.
- Reversionary Trust (n): A trust in which the property eventually returns to the person who created it, a key feature of the clifford trust structure.
- Income-Shifting Trust (n): A descriptive term for any trust designed to move income to a lower-tax beneficiary.
- Ten-year trust (n): A descriptive synonym highlighting the mandatory duration.
- Short-term trust (n): Another term used interchangeably, emphasizing the fixed, non-permanent nature compared to other trusts.
- a trust established to shift the income to someone who is taxed at a lower rate than the grantor for a period of 10 years or more