The planning of an international Clifford Trust affords the transfer of high-net-worth assets that would normally produce taxable income. A Clifford Trust is an irrevocable trust that enables tax-exempt income distribution to beneficiaries upfront, whilst allowing the assets and their underlying value to be reclaimed by the settler at time of expiry. Though moderately popular with estate planners based in the United States due to tax assignment to the grantor of the trust, the Clifford Trust offers an investor the opportunity to withhold detrimental tax impact on high-net-worth beneficiaries. If planning an international trust involving foreign national heirs seeking tax relief, a Clifford Trust will shelters those assets from dual tax reporting obligation (12 Int’l Bus. Law. 394 (1984)).
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
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