Paul has a lot of interest-bearing investments and is in the 37% marginal tax bracket (for ordinary income). In order to reduce his overall tax liability, he plans to gift the assets to his three children (who are his qualifying children, under age 18, for tax purposes) so that the interest will be partially shielded by their full standard deductions of $12,000 and then taxed at the children’s lower marginal tax rates. The children range in age from 5 to 9 years old and have no earned income. He also has an adult nephew (who is a non-dependent) in a lower tax bracket that he would like to loan $50,000 so that the nephew can use the investment income to pay for living expenses. He believes that loaning the money to his nephew will lower the marginal tax rate applied to the investment income (and the tax liability) while still providing him (Paul) with access to the principal (The loan is payable on demand). Further, Paul also runs a small business and believes that he can shift some of his income to other family members by employing them in his business (so that the income will be shifted to family members in a lower marginal tax bracket). Do you see any problems with Paul’s proposed tax strategies? Is there a way he can lower the marginal tax rates applied to the investment income while keeping the assets within the control of family members?