The “kiddie tax” isn’t just for kids anymore. Due to recent tax law changes, investment income earned by a child may continue to trigger the additional tax well into his or her 20s. This can put a damper on traditional college savings techniques for children.
Strategy: Establish a “minor’s trust,” also called a Section 2503(c) trust, for kids or grandkids. With this type of trust, all of the income is taxed directly to the trust. In other words, the kiddie tax never comes into play.
A minor’s trust has at least one distinct advantage over the better-known option of a custodial account. Reason: The trust can continue past the age of majority in the state where the family lives.
Therefore, there are no worries about children squandering the funds in their accounts. And, if you’re the trustee, you can still call the shots for the trust all the way to graduation day. It’s a win-win situation.
Benefits of a trust
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