However, the Kiddie tax severely limits the benefits of transfers of income-producing property to children under the age of 14. For all direct transfers, the primary disadvantage is the loss of control by the donor over the assets transferred. There is no requirement that the assets be used for education costs. An additional disadvantage arises for a child who may need to apply for financial aid. Therefore, assets owned directly by a child may reduce the amount of available financial aid.
Many people take advantage of custodial accounts to save for education costs.
A custodian, usually the minor's parent or grandparent, receives assets for the minor and holds them in a separate account under the minor's name. The custodian has the power to invest the assets and use the property for the minor's benefit. The availability and type of custodial account depends upon state law. Custodial accounts terminate at age 21 regardless of the age of majority in the state. Income earned on custodial property is taxable to the minor.