Do you want to help your children who are just starting their careers? One way to provide this help, without giving away assets, is to make loans to your children. Your children can invest in bond funds or CDs and probably owe little tax on the investment income.
Such loans have to bear interest, which needs to be paid from the borrower to the lender, to survive an IRS challenge. Currently, the annual Applicable Federal Rate, which is the appropriate interest rate to use, is 0.74% for a loan of not more than three years. Therefore, your child would have to pay you little interest for the next three years; at that point, he might repay the loan if his income has increased.
This tactic works best if the loans are made to children who have either finished school or reached age 24, whichever comes first. If you make loans to full-time students under age 24, investment income over $1,900 (in 2010) will be taxed at your tax rate.
