When planning an international trust, a Clifford Trust will allow a grantor to transfer high net worth assets that produce taxable income into an estate’s trust with the option of reclaim at time of trust expiry. Though used little at present, the Clifford Trust offers the opportunity for high net worth beneficiaries tax relief. If planning an international trust involving foreign national beneficiaries, a Clifford Trust will protect heirs from withholding tax at time of transfer (12 Int’l Bus. Law. 394 (1984)).
Rules to ‘Clifford Trust’ Tax Shelters
Prior to the Tax Reform Act of 1986, Clifford Trusts have been used to tax-shelter assets through transfer of earned income to children from a parent or grandparent’s estate. Post-enactment of the Act, it was mandated that Clifford Trust income be taxed to the grantor, making these trusts nearly obsolete since with exception of use as an effective legal means for large tax expense avoidance and to avoid withholding by international trusts involving foreign national family beneficiaries.
General Grantor trust rules for Clifford Trusts or other revocable living trusts allow for grantors to control the assets, property, and other investments in a trust. Income generated by trust assets is taxed to the grantor rather than the trust itself. A Grantor can modify the administrative rules of a trust, designate a trustee or trust advisor as a representative of the trusts interests, and can terminate a trust at will. It a grantor relinquishes control of a trust, it then becomes an irrevocable trust. In such case, income tax obligation shifts from the grantor to the trust itself.
Tax treatment of income from transfer of assets to a Clifford Trust continues to offer beneficiaries a lower marginal rate. According to federal Internal Revenue Service (“IRS”) rules, the individual responsible for creation of a grantor trust is the owner of the assets held within the trust for purposes of income and estate tax. Clifford Trusts have a mandatory not less than ten years plus one day term.
A Clifford Trust May be the Answer If . . .
The use of a Clifford Trust as an estate planning tool for grantors who are U.S. citizens, residents and non-U.S. citizens can be useful for those seeking tax-exemption for non-U.S. beneficiaries in trust and succession planning. An experienced estate law attorney will be able to determine if a Clifford Trust is the proper investment vehicle for assets of grantors who are not U.S. citizens nor U.S. domiciliaries for consideration of gift and generation-skipping transfers and estate transfers of U.S. situs assets for purposes of tax treatment, including cross-border taxation issue. Ask an estate law attorney about the benefits of a Clifford Trust as part of an estate plan.
New York Estate Law Firm
Ettinger Law Firm is a licensed New York attorney practice specializing in estate planning and probate litigation. Contact Ettinger Law Firm to schedule an international estate planning consultation.
See Related Blog Posts