WHAT IS Clifford Trust
BREAKING DOWN Clifford Trust
Clifford Trusts often were used to shift assets that produced income to children from their parents prior to the Tax Reform Act of 1986. However, this legislation rendered this strategy impractical, as the Act mandated that Clifford Trust income must be taxed to the grantor. Therefore, few of these trusts have been created since then. Clifford Trusts once were commonly used as an effective and legal means of avoiding large tax expenses. The grantor would shift their assets to a trust which would then later be claimed by a recipient who ideally would be subject to a lower marginal tax rate. These trusts were mandated to be for a term of not less than 10 years plus one day. Grantor trust rules are guidelines within the Internal Revenue Code, which outline certain tax implications of a grantor trust. Under these rules, the individual who creates a grantor trust is recognized as the owner of assets and property held within the trust for income and estate tax purposes.
Grantor trust rules
Grantor trust rules allow grantors to control the assets and investments in a trust. The income the trust generates is taxed to the grantor rather than to the trust itself. Grantor trust rules offer individuals some degree of tax protection because tax rates are generally more favorable to individuals than to trusts.
Grantors can change the beneficiaries of a trust along with the investments and assets within it. They can direct a trustee to make alterations as well. Grantors can undo the trust as long as they are deemed mentally competent at the time the decision is made. This distinction makes a grantor trust a type of revocable living trust. However, the grantor is also free to relinquish control of the trust making it an irrevocable trust. In this case, the trust itself will pay taxes on the income it generates and the it would require its own tax identification number or TIN. A grantor trust agreement dictates how assets are managed and/or transferred after the grantor's death. Ultimately, state law determines if a trust is revocable or irrevocable as well as the implications of each. Grantor trust rules also outline certain conditions when an irrevocable trust can receive some of the same treatments as a revocable trust by the Internal Revenue Service.