Planning an International ‘Clifford Trust’

Before the Tax Reform Act of 1986, Clifford Trusts were used to shelter assets from taxation by way of the estate transfer of earned income to children or grandchildren. Since the Act, tax treatment of Clifford Trust is assigned to the grantor, thus explaining their obsolescence for tax avoidance purposes. In other words, income generated by trust assets is taxed to the grantor, rather than to the trust itself. Incentive is the ability to protect foreign national family beneficiaries from issues related to dual taxation, with delayed responsibility for income tax reporting.

Nevertheless, grantors cite certain flexibility afforded with Clifford Trust formation. The originator or trustee of the trust maintains control of the assets, property, and other investments transferred to the trust until it comes into effect. Grantors can modify the administrative rules of a trust, including designation of a trustee or trust advisor to represent the interests of beneficiaries, and can terminate it at will.

Income tax treatment of asset transfers from a Clifford Trust protects beneficiaries at a lower marginal rate. Federal Internal Revenue Service (“IRS”) rules stipulate the grantor of a Clifford Trust, is the owner of the assets held within the trust for purposes of income and estate tax until death or transfer. Relinquish