18. Short Term (Clifford) Trust

A short term Trust (sometimes referred to as a "Clifford" trust) is an arrangement whereby its Grantor places certain income-producing cash investments or real estate into a Trust designed to exist for a minimum time period of ten years and a day.

The instrument (Trust Agreement) creating the Trust is drawn in such a way that all powers of ownership now become vested in the Trustee. At the conclusion of the Trust period, the assets are returned to the Grantor of
the Trust, causing this type of arrangement to be called a "Reversionary Trust."

The basic purpose of the short term Trust is to reallocate taxable income from the Grantor to a taxpayer in a lower tax bracket. The beneficial results of a short term Trust may be illustrated by assuming that a parent in a high tax bracket is faced with the problem of providing college funds for a child. The short term Trust will yield more after-tax
income than the parent would have received from the income producing property without the benefit of the Trust arrangement.

Unlike an outright gift which would also reduce income taxes, the assets in the Trust will revert to the Grantor after the end of the period or upon the death of the beneficiary. The Trust may also terminate at the
Grantor's death. This type of arrangement is irrevocable, so it is essential that the Grantor be confident it is consistent with all financial and planning objectives.

Once the agreement has been executed, it is essential that the Trust be funded immediately. When funded, there is a gift based on the commuted value of the expected income payments to the beneficiary.

A properly drawn Trust Agreement is vital to the success of this arrangement. The Trustee could be an individual, but the legal and administrative responsibilities are such that it is nearly always advisable to use a corporate (bank) Trustee. Your legal counsel must be consulted for the drafting of appropriate documents.

Tax reference verification 1-800-829-1040

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