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Tax consequences of a child's inheritance

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in Small Business Tax

Q. Our six-year-old grandson is about to receive an inheritance. His mother claims him as a dependent. If we set up an account for him, will he be taxed on the income earned from the account? B.S., Orange, Texas

A. Yes. We’re assuming that you intend to establish a custodial account with an adult—perhaps, the child’s mother—as the custodian. The account will be listed in your grandchild’s name under his Social Security number. Any subsequent income earned by the assets in the account will be taxed directly to the grandchild. Tip: Although the child will generally benefit from lower tax rates, be aware of the kiddie-tax rules, which say that investment income received by a child that exceeds a set annual amount will be taxed to the child at his parents’ tax rate.

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