Definition
The term Clifford trust refers to an irrevocable, but temporary trust, that allows a beneficiary to derive income from the assets placed in the trust. After a term of at least ten years plus one day, a Clifford trust can expire and the assets are returned to the donor.
Explanation
Clifford trusts are a temporary, irrevocable, living trust. The donor / settlor deposits assets into the trust; which are subsequently converted by a trustee to income-producing investments. The beneficiary enjoys a steady source of income until the trust expires, which is a minimum of ten years plus one day. At this point, the trust's assets are returned to the donor / settlor.
Clifford trusts were originally created to take advantage of a loophole in federal income tax regulations. Trusts created before 1986 were taxed at the donor's rate until a minor child (the trust's beneficiary) reached the age of fourteen. Once the beneficiary reached age fourteen, the income derived from the trust was taxed at the child's rate, which would be much lower than the donor's. This loophole was closed by the Tax Reform Act of 1986, which led to the decline in the popularity of Clifford trusts. Today, the income derived from a Clifford trust is taxed at the donor's rate, even when the child reaches age fourteen.
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