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An irrevocable, but temporary, living trust into which one deposits assets on behalf of a beneficiary. In a Clifford trust, assets are invested and all income from these investments are given to the beneficiary, who is usually a minor child. Once the trust expires, however, the assets revert to the donor. A Clifford trust must exist for at least 10 years unless the donor dies in the meantime. Formerly, income on the assets in Clifford trusts were taxed at the minor child's tax rate (which was usually very low) after the child turned 14. As a result, Clifford trusts could be used as a tax loophole. However, the loophole was closed in 1986.
A temporary trust (established to last at least ten years and one day or until the death of the beneficiary) in which assets are irrevocably transferred to the trust and income from the trust is given to the beneficiary. When the trust is terminated, the principal passes back to the creator. Clifford trusts are used almost exclusively by people with dependent children or dependent parents. Income from trusts created before March 1, 1986, is taxed at the creator's rate until the minority child reaches 14 years of age. At that time the child's tax rate applies. For trusts created after March 1, 1986, the income is taxed at the donor's rate even after the minority child has reached 14 years of age. Tax reform passed in 1986 eliminated most of the tax advantages of Clifford trusts.