Mutual funds that invest in foreign stocks have unique tax implications. Global or international funds generally must withhold foreign taxes on overseas income distributed to shareholders. U.S. investors in international stock funds may be able to claim a credit for foreign taxes withheld that will reduce their U.S. federal tax liability. Foreign taxes withheld on investments in a retirement account, however, do not qualify for the foreign tax credit. Transferring assets to children may reduce overall taxes.
Direct gifts allow the child to have immediate control of the assets.
Income earned on direct gifts and custodian accounts is taxable to the child. Trusts are appropriate when the parent wants to delay the child's receipt and control of the trust assets beyond the legal age of majority. Certain investment products rely heavily on tax benefits to generate competitive rates of return. Investments that have poor economic fundamentals, but that are designed to take advantage of certain tax rules, have generally been poor performers. These are some guidelines to consider when making investment decisions.