Written in : June 1999

For the past several years, income accruing to your minor children gets clubbed in your hands. Children have no separate assessment. Children, as a tax planning measure, lost their importance. As an aside, there is also no incentive to have more children to save tax. Now family planning and tax planning go hand in hand.

However, it has resulted in higher income in the hands of parents. Is there a way out where your children's income is not clubbed in your hands? Not many, but there are some ways. Here is one.

The law is that all income accruing to a minor child gets clubbed with that of the parent having the higher taxable income. Before this amendment, only income arising to a minor child out of your gifts was clubbable in your hands.

One mode adopted often in the past was when trusts were created for the benefit of minors and income was diverted to such trusts. Many amendments to law have made trusts virtually useless.

However, there is one way in which trusts can even today be used for minors, which can be used to avoid clubbing. Consider this.

You create a trust for the benefit of your minor child. You gift moneys to the trust. The trust also receives money from others. It makes investments of the money it has and earns income. The funds of the trust are managed by its trustees.

However, the trust is formed with a difference. According to the trust deed, the minor is not entitled to the income or the assets of the trust during his minority but only after he attains majority. What turns on this clause?

Whatever income accrues to the trust, the trustees are obliged to accumulate it and not hand it over to the minor child during his minority. They, the trustees, will be at liberty to distribute the trust income, accumulated over the years, to the minor only after a date mentioned in the deed which is after the minor's attaining majority.

The income accruing to the trustees is not for the benefit of a minor. It is, in fact, received in trust for the future benefit of a person who is now a minor but it would accrue to him only when he becomes a major.

The income is not, therefore, accruing to the minor and it would not be clubbed in the hands of the parent. It would get taxed in the hands of the trustees, year after year, till the child becomes entitled to the benefits under the trust deed.

The flip side is that the income will remain undistributed till the minor attains majority.

Interesting, yes?

Are there other ways of avoiding minor's income being clubbed? Yes, but a little complicated. We shall perhaps discuss them sometime later.

There was a dance teacher who talked of a very old dance form called the 'Politician'. "All you have to do" she told her class "is take three steps forward, two steps backward, then side-step and turn around".