If you have not learned by now, the Tax Man always gets his share, regardless of whom it is coming from. Even if you opened up the account for your grandchildren, earnings are taxable, regardless if the person who opens the account of the beneficiary of the account is required to pay taxes.
The silver lining in this cloud is the fact that most funds set up in this manner are generating far more income than standard savings methods available to investors. That being said, there should be enough interest income generated to offset the additional taxes that are paid each year.
You are not coming out as far ahead as you would like, but you are still ahead.
There are investments that will let you avoid paying taxes, such as bonds. This will let you reclaim any taxes on interest earned on the investment. However, as we hinted above, if the account is being set up as a long-term investment for the child’s future, you are much better off paying the taxes and enjoying the higher interest earnings that an equity-based investment offers.