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. Furthermore, the family partnership rules under IRC §704(e), “Family partnerships” reallocate partnership or LLC income back to the parents if the child does not contribute capital or perform services commensurate with their allocation.

Legitimate wealth-transfer strategies include the following structured steps:

1.

Hire your child in a family business. A child can earn up to the standard deduction ($16,100 in 2026) tax-free. 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. 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 Child Savings Accounts. Introduced under the OBBBA for tax years beginning in 2026, these accounts allow tax-advantaged contributions of up to $5,000 per year for children under 18. Employers can make tax-free matching contributions up to $2,500. The federal government provides a one-time $1,000 seed contribution for children born during the initial window.

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 for K–12 tuition under the OBBBA). 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 can sell the assets and utilize their own 0% long-term capital gains tax bracket (up to $49,450 of taxable income in 2026), eliminating the family’s tax liability on the appreciation.

6.

Family Limited Partnerships (FLP) or Family LLCs. For estates exceeding $10M, 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 (section “Estate planning”).

Exaggerated and ineffective structures include:

• Custodial accounts as tax shelters: UGMA/UTMA accounts are only tax-free up to the Kiddie Tax threshold ($2,700 in 2026); above this, unearned income is taxed at the parents’ marginal rate.
• Toddler LLC ownership: Allocating business profits to a non-working minor violates IRC §704(e).
• Toddler holding companies: Shell companies owned by minors with no business activity generate franchise taxes and administrative fees without offering tax benefits.