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Clifford Trust: A Comprehensive Guide to Its Legal Framework
Definition & Meaning
A Clifford trust is a type of irrevocable trust designed to benefit a designated beneficiary, typically children, by allowing them to receive income generated from trust assets. The principal, or the original assets placed in the trust, reverts back to the settlor, or creator of the trust, after a minimum period of ten years. This structure was originally intended to shift income from higher tax bracket parents to lower tax bracket children. However, changes in tax law have affected its benefits.
Table of content
Legal Use & context
Clifford trusts are primarily used in estate planning and tax strategy. They fall under the category of trusts in family law and tax law. Users can manage the creation of a Clifford trust using legal forms and templates, which can simplify the process. However, due to the complexities of tax implications, consulting a legal professional is advisable.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A parent establishes a Clifford trust for their child, allowing the child to receive income from the trust's investments for ten years. After this period, the original assets revert to the parent.
(Hypothetical example): A grandparent sets up a Clifford trust to provide for their grandchild's education. The grandchild receives income from the trust during their college years, and the assets return to the grandparent after graduation.
State-by-state differences
Examples of state differences (not exhaustive):
State
Key Differences
California
Specific tax implications may vary; consult local tax laws.
New York
State income tax rules may affect the trust's benefits.
Texas
No state income tax; different considerations for trust benefits.
This is not a complete list. State laws vary, and users should consult local rules for specific guidance.
Comparison with related terms
Term
Definition
Key Differences
Revocable Trust
A trust that can be altered or revoked by the settlor at any time.
Unlike a Clifford trust, the settlor retains control over the assets.
Irrevocable Trust
A trust that cannot be changed or revoked once established.
Clifford trusts are a specific type of irrevocable trust with unique tax implications.
Common misunderstandings
What to do if this term applies to you
If you are considering establishing a Clifford trust, it is essential to consult with a legal professional to understand the implications fully. You can also explore US Legal Forms for ready-to-use legal templates that can simplify the process of creating a trust.
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Beneficiary: Income goes to a designated beneficiary
Principal: Reverts to the settlor after the trust period
Taxation: Settlor is taxed on the income generated
Key takeaways
Frequently asked questions
A Clifford trust is an irrevocable trust that allows income to be distributed to a beneficiary while the principal reverts to the settlor after a minimum of ten years.
Typically, children or other designated beneficiaries receive the income generated from the trust.
No, once established, a Clifford trust is irrevocable and cannot be altered or revoked by the settlor.
The settlor is taxed on the income generated by the trust, rather than the beneficiary.
Consult with a legal professional and consider using legal templates available through US Legal Forms to simplify the process.