Outright gifts of appreciated assets to your child or grandchild may be an effective way to shift income and assets to the child or grandchild. Significant income and estate tax savings can be achieved by outright gifts. However, you will immediately lose control of assets that are gifted outright to the child or grandchild.
The parents shifted $5,000 of income to their child by gifting assets to their children using custodial accounts. Since the parents income was taxed at the 20% tax bracket, the income reduction may decrease their income taxes by $1,000 ($5,000 x 20%). 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 $1,000.
If you are in a combined (federal, self-employment, and state) tax bracket of 20%, you could reduce your taxes up to $200 for every $1,000 of income reduction by gifting assets to your children using custodial accounts.