subject: Lessen Income Tax Payable [print this page] Lessen Income Tax Payable Lessen Income Tax Payable
An elementary device for lessening the income tax payableon the return from investments security, is to create a trustfor not less than ten years providing for the income to bepayable to a minor child or children in an annual amount notto exceed $599 per child. The result of such an arrangement isthat the child, since his or her income is under $600, is notliable for taxes and the parent still enjoys the $600 exemption allowed for a minor child.
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Where two of your children are involved, you may avoidtaxes on $1,198 in income from securities for each taxable year and still preserve your capital. In the meanwhile, youmay build up a tax-free nest egg for the benefit of yourchildren, without paying a gift tax.
As a practical matter, you can increase the nest egg substantially by using the income from the securities deposited inthe trust to "fund" a ten-payment life insurance plan for eachchild.
Let us assume that you have deposited $30,000 hi blue chipsecurities in the trust fund, and that the securities earn anaverage of 4% annually, or $1,200. The income of $599which is payable to the child will purchase a $12,500 ten-pay ment life insurance policy for an 11-year-old boy or girl.
If the income from the trust is $1,200 a year, and $600 is used to pay the premiums on the ten-payment life insurance policy, the remaining $600 of income will be taxable to the trust at 20%. Thus, approximately $480 will remain to purchase an additional $12,500 ten-payment life insurance policy.When the child attains age 21, and when the trust, having runits term of ten years, is closed out, the father receives thereturn of his original capital investment, along with whatevergrowth has been achieved by way of stock splits and naturalaccretion. The child will have a completely paid-up life insurance policy in the amount of $23,000.
If the father was in a 43% tax bracket, he therefore willhave given up only $684 hi each of the ten years of the trusthi order to accomplish this program. The remaining $516each year represents what he would have been required to payhi federal income tax on $1,200 had he not set up the trust. Inhigher tax brackets, the results are even more favorable. Thus,hi a 60% tax bracket the father parted with only $480 peryear, or a total for ten years of $4,800, to fund a substantialinsurance portfolio for his child.
Instead of investing hi a life insurance policy, the fathercould have placed the income from the trust into a savings account and could have permitted the savings to accumulate,or he could have purchased securities hi the name of the childor hi the name of his wife as custodian for the child. A nestegg has been built up which will permit the payment of achild's college tuition, and may in effect give the child a "taxscholarship" to college.
