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How to Efficiently Transfer Your Hard-Earned Income to the Next Generation

As a parent, you want to do everything you can to ensure that your children have a bright future. One way to do this is to transfer your hard-earned income to them in a way that is efficient and tax-advantaged. There are a few different ways to do this, but it is important to speak with a certified tax planner or accountant to determine the best option for you.


Hiring your child for marketing in your business

One way to transfer income to your children is to hire them for marketing in your business. You can avoid paying taxes on the first $12,000 of their earned income. This would be a “pre-tax” expense from the business, so it is efficient from a tax perspective. However, there are a few things to keep in mind:

  • Your child must actually perform real work for your business. They cannot simply be a figurehead or a "paper employee."

  • You must pay your child at least minimum wage.

  • You must withhold taxes from your child's paycheck and file a W-2 form with the IRS.


Education plans

Another way to transfer income to your children is to use education plans. There are two main types of education plans: 529 plans and Coverdell Education Savings Accounts (ESAs).

  • 529 plans: A 529 plan is a tax-advantaged savings plan that parents can contribute up to $10,000 per year per child to be used to pay for qualified education expenses, such as tuition, fees, books, and supplies. Contributions to a 529 plan are not tax-deductible, but earnings grow tax-free and withdrawals are tax-free as long as they are used for qualified education expenses. There is no income limit for contributions.

  • Coverdell Education Savings Account (ESA): An ESA is a tax-advantaged savings account that parents can contribute $2,000 per year per child to be used to pay for qualified education expenses, such as tuition, fees, books, and supplies. Contributions to an ESA are made with after-tax dollars, but earnings grow tax-free and withdrawals are tax-free as long as they are used for qualified education expenses. There is no income limit for contributions.


Investment accounts

A third way to transfer income to your children is to open an investment account in their name. There are a few different types of investment accounts that you can open, such as a custodial account, a UTMA/UGMA account, or a health savings account (HSA).

  • Custodial / UTMA/UGMA account: A UTMA/UGMA account is a type of custodial account that can be opened for any minor child. The money in the account belongs to the child, but the parents or guardians have control over it until the child reaches the age of majority (usually 18 or 21). Contributions to a UTMA/UGMA account are not tax-deductible, but earnings grow tax-deferred until the child withdraws the money.

  • Health savings account (HSA): If you have a high-deductible health plan (HDHP), you may be eligible to contribute to an HSA. An HSA is a tax-advantaged savings account that can be used to pay for qualified medical expenses. Contributions to an HSA are made with pre-tax dollars, so you save money on your taxes. Earnings in an HSA grow tax-free and withdrawals are tax-free as long as they are used for qualified medical expenses.


Other resources

There are a few other resources that you can use to transfer income to your children. These include:

  • Gift via the gift tax exemption: The gift tax exemption limit for 2023 is $17,000 per child per year per parent without having to pay gift tax. If you give more than that, you will need to file a gift tax return. This will be based on after tax income so is not necessarily tax efficient from the parents perspective. Note that contributions to some plans listed above will count towards the annual gift tax limit.

  • Education tax credits: There are a number of education tax credits available to help families pay for college. These credits can reduce your federal income tax liability by hundreds or even thousands of dollars.

  • Tuition and fees deduction: You may be able to deduct qualified tuition and fees on your federal income tax return. The deduction is limited to $4,000 for the 2022 tax year.

  • Set up a trust: There are many different types of trusts, so you will need to work with an estate planning attorney to choose the one that is right for you and your family.


Where to invest:

  • Savings accounts: Savings accounts are a low-risk investment option that offer a guaranteed return. The average annual return for a savings account over the past 10 years is ~0.1%.

  • Money market funds: Money market funds are a type of mutual fund that invests in short-term debt securities. They offer a slightly higher return than savings accounts, but they are not FDIC insured. The average annual return for a money market fund over the past 10 years is ~1%.

  • Bond funds: Bond funds are a type of mutual fund that invests in bonds. Bonds are loans that are issued by governments or corporations. They offer a higher return than savings accounts or money market funds, but they also carry more risk. The average annual return for a bond fund over the past 10 years is ~4%.

  • S&P 500: S&P 500 funds are a type of mutual fund or ETF that invests in the S&P 500 index. The S&P 500 is a stock market index that tracks the performance of 500 large companies in the United States. S&P 500 funds offer the highest potential return of any of the investment options listed here, but they also carry the most risk. The average annual return for an S&P 500 fund over the past 10 years is ~15%.

Who / What is Lunchline Partners?

We partner with entrepreneur investors who build, grow, and invest in great businesses for the long term via minority or control investments. We believe in the power of people and community, and we are committed to helping businesses flourish. In addition to Lunchline Partners, we also own and operate Otter Learning, which is a nationwide operator of childcare facilities where we are still intimately involved in daily operations, growing the business and capital formation. At Otter Learning, we started as the first employees and built everything from the ground up. This keeps us in the flow of what it’s like to operate in today’s environment.


Our foundations at Lunchline Partners are built on trust, reliability, and compassion. We aim to do what we say we will, when we say we will, and we strive to create meaningful and high-trust relationships with our partners. We also believe that people are everything, and we are committed to working with people who share our values.

  • We invest in companies that are committed to the long term. We believe that businesses that focus on building sustainable value will be the most successful in the long run.

  • We invest in companies that have a clear vision for the future. We want to partner with businesses that have a plan for growth and that are excited about the future.

  • We invest in companies that are committed to doing good in the world. We believe that businesses have a responsibility to give back to the communities they serve.

If you are a business owner who is looking for a partner who shares your values, then we encourage you to contact us. We would be honored to learn more about your business and how we can help you achieve your goals.


Here are some of the benefits of working with Lunchline Partners:

  • We provide long-term financial resources and support.

  • We offer our expertise and experience in business operations, capital formation and so much more!

  • We have a network of contacts that can help you grow your business.

  • We are committed to helping you achieve your goals.

If you are interested in learning more about how Lunchline Partners can help you grow your business, please contact us. We would be happy to answer any questions you have and to discuss how we can work together.

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