Case Example

One of our clients had taxable investment income from various investments of approximately $200,000, consisting of rental income and interest from bonds, and trust deeds that he owned. He paid combined federal and state taxes of $80,000 per year on this income. As part of an overall business plan that we established, this investment income was routed through a Family Savings Trust, which owned the interests in the Family Limited Partnership. His adult children and parents that he supported were beneficiaries of the Family Savings Trust. Under the partnership agreement, the children and parents were taxable on $100,000 of the $200,000 in income generated by the partnership. The combined lower tax brackets of these beneficiaries reduced the taxes on the $100,000 from $40,000 to $15,000. This produced a savings of $25,000 in overall family income taxes. Under the partnership agreement, it was not required that the $100,000 actually be distributed to any of the partners. In fact, the parents as general partners retained all of this amount within the partnership, except for what was needed to pay the taxes on the limited partners’ shares of partnership income. The parents thereby reduced their annual income taxes by shifting a substantial amount of income to these lower bracket family members. This and similar strategies for shifting income from high to low bracket family members will assume increased importance as tax rates increase within the brackets. These plans are currently under consideration in Congress as extending or repealing the Bush era tax cuts are debated.


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