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Kiddie Tax Loophole for a Minor's Trust

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in Small Business Tax

Q. Several recent issues have dealt with ways to avoid the kiddie tax. Can’t one avoid this tax by setting up a trust for a child from which no money can be withdrawn until the child is ready to attend college? T.F.W., Green Bay, Wis.

A. Yes. The type of arrangement you refer to is often called a minor’s trust or Section 2503(3) trust. In effect, the income generated each year is taxed to the trust itself rather than to the child. Thus, it contains no kiddie-tax complications. We’ll be providing additional insights into the minor’s trust arrangement in an upcoming issue.

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