But, if the child has a fairly large existing portfolio of growth stocks, and you are looking for some diversification, you can make this type of investment fit the bill. No, I don't mean file for divorce. Rather, know that if the child's parents are divorced, legally separated, or treated as not married, only the taxable income of the custodial parent is taken into account to determine the child's kiddie tax liability. Note, however, if the custodial parent files a joint return with a spouse who is not a parent of the child, the total taxable income shown on the joint return is used to determine the parent's taxable income for purposes of the kiddie tax. Remember that the kiddie tax rules only apply to unearned income.
Earned income is exempt from the kiddie tax rules.
So, if you have a business, consider hiring the little tykes. You can pay them generous, but defensible, hourly rates. Not only will the child receive earned income rather than unearned income, the business can claim a deduction for reasonable compensation paid to the child. These are just a few ideas that you can use to plan around the kiddie tax rules, and there are certainly others. There are enough options available to keep the kiddie tax from completely killing your hope of transferring wealth to the kids at a lower tax rate.