Case Example

One of our clients had taxable income from various investments of approximately $200,000, consisting of interest and dividends from bonds, stocks, and trust deeds that he owned. He was in a 32 percent maximum tax bracket and paid taxes of approximately $64,000 per year on this income. As part of an overall business plan that we established, all of his assets were transferred into a Family Limited Partnership and a total of seven children and grandchildren were brought in as limited partners of the partnership. Under the partnership agreement, the children and grandchildren were taxable on $100,000 of the $200,000 in income generated by the partnership. Each of these children was in a maximum tax bracket of 15 percent, and thus, the total taxes owed on this $100,000 of investment income was reduced from $32,000 to $15,000. This produced a savings of $17,000 in overall family income taxes. Under the partnership agreement it was not required that the $100,000 actually be distributed to the children. In fact, the parents as general partners retained all of this amount except for what was needed to pay the taxes on the children’s share of partnership income. The parents thereby reduced their annual income taxes by shifting a substantial amount of income to their children. The tax savings were held as a college fund for the grandchildren.