A minor’s trust can be used to shift income to your child. At the trustee’s discretion, the principal and income of the trust must be available for your child’s benefit during the trust term. In addition, your child must have the right to a full distribution of all income and principal at age 21. If your child does not choose full distribution after his 21st birthday, the trust may be continued for an additional period of time specified in the trust.
The parents shifted $5,000 of income to their child by using a minor’s trust to shift income to their child. Since the parents income was taxed at the 30% tax bracket, the income reduction may decrease their income taxes by $1,500 ($5,000 x 30%). Since the childs taxable income was taxed at the 0% tax bracket, there may be no tax on the income. Therefore, because of the income shifting, the total family tax savings may be $1,500.
If you are in a combined (federal, self-employment, and state) tax bracket of 30%, you could reduce your taxes up to $300 for every $1,000 of income reduction by using a minor’s trust to shift income to your child.