Short Term Trust Law and Legal Definition

Short term trust is an irrevocable trust set up for a minimum of 10 years and a day, after which the principal reverts to the grantor. Income from the trust property is paid to the beneficiary but the property itself reverts back to the grantor when the trust expires. These trusts were created to set aside funds for education of the grantor's children. It was also often used by parents, with their children as beneficiaries to shelter investment income. A key feature of this trust is that is that the earnings from the principal are taxed at the beneficiary's tax rate instead of the presumably higher tax rate of the grantor. However these tax advantages were curtailed by the Tax Reform Acts of 1969 and1986.

Short Term Trust is also known as Clifford trust after the case Helvering v. Clifford, 309 U.S. 331 (U.S. 1940)