The system seems to do it's own thing for folders. I had all my music on a thumb drive with folders by Artist > Album. However, after spending several hours downloading about 9gb of music (over 200 albums), I discovered - as you did - that the system reformatted all the folders.
So you have a few options (here are a few I tried). You can set up a music genre of "kids" (use the "new genre" option). You then can edit all your kids albums by changing each song in each folder to "kids" (yes, each song...sorry).
Another option is to change the artist on each album by adding the work "kids" to the start or end of each. Again, you have to edit each song in each folder to match the new artist name you have created.
I did this for all my holiday music, because for several artists every time I played music "by artist" the holiday music was mixed in. So I can now play "Michael Buble" or "Michael Buble - Christmas". (Hey, is it just an example, so don't diss me on my eclectic music preferences - I have a lot of country western, jazz and rock as well).
By the way, be prepared to have some albums refuse to download any of the supporting information (no artist, title, song titles, anything) or any combo. Every time I complete downloading or adding to the HDD I search for "UNKNOWN" folders for artist, genre, album title, etc using the A-Z search function. After my initial download of over 200 albums, I had over 1000 songs with at least 1 each to do. It took me months to fix.
Perhaps your best option is to put all the kids songs on a dedicated mini-thumbdrive. The negative to that there is a delay at each key cycle for the thumbdrive to "queue up". And it always starts at the beginning of the thumbdrive, not where it left off. Hopefully you don't have "Wheels on the Bus" in the #1 spot on the thumbdrive, because listening to that over and over...could push you over the edge. Best luck.