There are two key issues to consider. The first impact is on financial aid, and the second is on taxes.
First, the Expected Family Contribution, used on the Free Application for Federal Student Aid (FAFSA) to determine eligibility, considers parental and child assets. A child's assets and income are counted more heavily under the Federal Financial Aid Formula. This impact may need to be considered in allocating assets.
Second, many parents think that saving in a child’s name will reduce income taxes while saving for the future. This may not be true due to something known as the "kiddie tax," which is the term given to income taxes on the unearned income (e.g., dividends, interest, and capital gains) of minor children and, since January 2008, young adults. Under current "kiddie tax" rules, a child's investment income that is greater than $1,900 (in 2012) is taxed at the top marginal income tax rate of the child's parents until a child turns 18 or through age 23 if the child is a full-time student. Some exceptions apply for older children with jobs that provide a majority of their support.
Assets in your child’s name will more adversely impact financial aid opportunities than assets maintained in the parent's name. You may want to place college savings in both places to both reduce negative impacts on college financial aid offers and to reduce or avoid the kiddie tax by lowering your child's unearned income.
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