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The “Incorporate Your Kids” Myth

Social media frequently promotes the claim that wealthy families avoid income tax by “incorporating” their children at birth. This is tax evasion. Under the assignment-of-income doctrine, income is taxed to the individual who performs the labor or owns the capital that generates it. The family partnership rules under IRC §704(e), “Partnership interests created by gift” reallocate partnership or LLC income back to the parents if the child does not contribute capital or perform services commensurate with their allocation.

What actually works is a short list, and every item on it starts with the child owning either labor or capital:

1.
Hire your child in a family business. A child can earn up to the standard deduction ($16,100 in 2026) free of federal income tax; California starts taxing at its own $5,706 standard deduction. Under IRC §3121(b)(3)(A), wages paid to a child under age 18 by a parent’s sole proprietorship or partnership (where only the parents are partners) are exempt from FICA taxes, and from FUTA until 21 under IRC §3306(c)(5). For S or C corporations, parents can establish a family management company structured as a sole proprietorship or partnership to contract with the corporation and pay the child, preserving the FICA exemption. Work must be legitimate, age-appropriate, and compensated at market rates under IRC §162.
2.
Custodial Roth IRA. A child with earned income can contribute up to the lesser of their earnings or the annual limit ($7,500 in 2026) to a custodial Roth IRA (section “Roth IRA”). Because the child’s marginal tax rate is 0%, the contribution is made with tax-free dollars, and growth and qualified distributions are tax-free.
3.
Trump accounts. Created by the OBBBA as IRC §530A, “Trump accounts”, effective for tax years beginning in 2026. Contributions are capped at $5,000 per year for a child under 18 (indexed after 2027), of which an employer may supply up to $2,500 excluded from the parent’s income under IRC §128 — inside the cap, not on top of it; only rollovers, the government’s pilot contribution, and qualified general contributions sit outside it under IRC §530A(c)(2)(B). The federal government makes a one-time $1,000 contribution for U.S.-citizen children born inside the pilot window. Contributions cannot be accepted before July 4, 2026, twelve months after enactment, so the first funding year is a half year.

The trap is a gift-tax one, and it is a cliff. Because the account is locked until the child turns 18, a contribution is a gift of a future interest and therefore does not ordinarily qualify for the $19,000 annual exclusion — meaning Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return” for any amount. Rev. Proc. 2026-25 grants a safe harbor treating these as present-interest gifts with no 709 required, but only if every condition holds, and the binding one is that total gifts from you to that child (Trump account, 529, everything) stay at or under $19,000 for the year. Breach it for one child — or make any other reportable gift that year — and every Trump-account contribution you made, to every beneficiary, reverts to a reportable future interest. The test is per donor, so each spouse has their own $19,000 line per child; §2513 gift-splitting cannot rescue you, because it is elected on a 709 and filing one disqualifies the harbor. Super-funding a 529 in the same year does the same damage. Direct tuition and medical payments under IRC §2503(e) are not gifts at all and sit outside the cap.

4.
529 Education Savings Plans. Contributions grow tax-free, and withdrawals are tax-free if used for qualified education expenses (which include up to $20,000 per year of K–12 expenses under the OBBBA — tuition, curriculum, tutoring, and testing fees). Under SECURE 2.0, up to a lifetime limit of $35,000 of unused balances can be rolled over to the beneficiary’s Roth IRA, provided the account has been open for at least 15 years (section “529 Plans”).
5.
Gifting Appreciated Assets. Parents can gift appreciated stock to children who are no longer subject to the Kiddie Tax (typically age 19, or 24 if a full-time student). The child takes your carryover basis under IRC §1015, “Basis of property acquired by gifts” — the gift transfers the gain, it does not erase it — and then sells inside their own 0% long-term capital gains bracket, which in 2026 runs up to $49,450 of taxable income for a single filer.

The usable room is smaller than that headline, because the gain stacks on top of the child’s other taxable income instead of getting its own allowance. A 22-year-old out of school and earning $30,000 has taxable income of $30,000 − $16,100 = $13,900 after the standard deduction, so the 0% capital-gains room left is $49,450 − $13,900 = $35,550. Gift stock with $35,550 of embedded gain and the family pays nothing; gift stock with $60,000 of gain and the excess $24,450 is taxed at 15%. Size the gift to the room, and repeat it annually instead of transferring the whole position at once.

6.
Family Limited Partnerships (FLP) or Family LLCs. For estates likely to exceed the exemption (section “LLCs for Estate Planning” for the entity and its break-even), parents can gift limited partnership interests. These interests are valued at a discount for lack of marketability and minority control (typically 25–35%), compounding the transfer of wealth while retaining parental control (chapter “Estate planning”).

Exaggerated and ineffective structures include:

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