Deceased Parent, Life Insurance, Business - Where to Turn for Advice?

Paying for College
1

(thanks in advance for reading this long post)

Two years ago my husband passed away suddenly from a cardiac dysrhythmia while on a bike ride. It was completely unexpected and we’re just getting to the point now that we’re starting to deal with some of our personal finance issues. He had an ok-sized life insurance policy and we owned our own business (a software development firm). I was only working part time for the business and have since started working more hours per week (around 25-30/wk). I was lucky to have a great network of people who offered to help me evaluate my options for the business and lucky that I have an MBA from Kellogg and good experience with tech companies and start-ups. I ended up deciding not to sell the business and instead to carve out a pretty large chunk of the ownership in the business and hire a CEO to help me run and grow it. In the past two years, we’ve doubled the size of the business (revenue and employees) and I’m optimistic that we’ll continue to be successful, but I now have a smaller % of the business and a much smaller income (I pay myself more than I used to, but the salary my husband drew from the business now pays the CEO). The kids both receive SS and between that and my income (only about $65K), we mostly pay our bills and haven’t had to make too many cuts to our life (kept the house, etc.). The business is profitable and we’re starting to get closer to our cash reserve targets, so I’m starting to be able to think about taking some distributions and that will help our income as well.

I have two children - a son in 6th grade and a daughter in 9th grade. Both are good to great students and could be looking at selective colleges in a few years. My son is currently attending an expensive, private, independent school and he’ll stay there at least through 8th grade. My daughter left the private school to attend our local public high school this past year and is doing well there. My question is whether or not anyone has any suggestions on who I could talk to about our financial situation as it relates to college and possible financial aid. If my husband were still alive, I know we wouldn’t be in a position to ask for aid. We had both worked at start-ups, hadn’t saved a ton and this business was just taking off when he passed away. We had invested most of our savings in it and we were behind on retirement (and really hadn’t saved for college). Our plan was that with the way the business was going, we’d be able to sock away college for each kid pretty easily from the profits and we’d continue to live on the income he paid himself. If the business didn’t continue to thrive, I would go back to work full time and my income would go entirely towards college. Now I’m in a more difficult situation. I’m on my own and while I have the money from the life insurance, I need to figure out how best to invest that for retirement and college and also need to figure out how it impacts any possible financial aid. We received some financial aid from the private school for my daughter’s last year there and for my son’s first year there, but given the business is now profitable and given it’s value as an asset along with my life insurance, I didn’t qualify for financial aid for my son for this coming year. I’m committed to keeping him there through 8th grade, but he’ll probably attend public high school at that point.

I’m definitely not looking for pity - I’m pretty lucky as far as most young widows go. While the life insurance wasn’t huge, it is substantial and I did have the business which allows me to stay employed, but in a more flexible way. I’m hopeful the business continues to grow and I’ll be able to pull enough profits out that I’ll be one of those lucky few who can comfortably be full pay at whatever school my kids choose, but I need to plan for reality and I’m guessing the reality is that my ownership in the business coupled with the life insurance could preclude us from qualifying for financial aid even if my income doesn’t increase. My DD is one of those overachiever, well-rounded, jack of all trade kids - she’s got mostly A’s in all honors/AP classes (only freshman in French IV and one of only 6 freshman in Algebra II honors, 3 Sport Athlete (2 Varsity Letters and 2 Freshman MVP awards), only freshman in auditioned vocal ensemble, part in musical, student senate, homecoming court, etc.), but I’m not convinced she’ll test well (my DS on the other hand is more of a great test taker - scored mid-20s on the ACT as part of talent search this year in 6th grade). In general, I know it’s too early to know where either one will want/be eligible for college, but I want to be sure I plan as well as I can financially given our circumstances.

I’m going to spend some time combing these forums and I’m going to reach out to an old college friend who has worked in financial aid for years, but I was wondering if anyone has any specific advice on our situation and/or who I should talk to. It seems like most financial advisors know less than I do about college and financial aid and I want to be sure I’m more knowledgeable too.

2

I’m no expert on financial aid, but from my experience, if you have the income and/or the assets to pay for college, you will get little to no aid. Colleges essentially say you don’t need it. The colleges determine your need, not you. As your kids get older, keep an eye on potential merit aid. General advice is it’s more important to save for retirement than pay for college, as retirement is something you can’t borrow for like college.

I’m glad to see you your husband had substantial life insurance. Please, everyone, make sure you have enough, which is probably even more than you think you need.

3

I think you should maybe put some money in retirement savings for yourself. If your state gives tax credit for 529 account contributions, you could also invest some in a 529 for each kid.

All I knew in 6th and 9th grade, was that my kids were good students. Test scores were years away.

And if they end up having really high stats, some schools might give them merit aid, if you don’t qualify for need based aid.

4

OP- condolences to your entire family on your loss. And congratulations that you’ve moved forward in such a productive way. I have several “young widow” friends who are nowhere near where you are in terms of clear thinking and long range planning (despite the friends and families pulling together to help). You are really remarkable.

Two thoughts.

1- Focus on overall financial planning- what makes sense in terms of your age, risk profile, tax liabilities, etc. Most people make financial aid planning a big deal and ignore the bigger picture- you don’t want to be one of those families who make a 50k financial mistake in order to qualify for an additional 3.5k in aid. Many, many people fall into that trap. So I wouldn’t worry if your financial planner doesn’t know much about college aid- the important thing is solid risk management (not just what happens if you die- what happens if you become disabled, how are your kids going to live, what happens if you get sued) and solid financial planning in terms of your retirement while not choking off the capital you need to grow your business and protect your kids.

2- It’s too early to know what your kids will need, how the financial aid picture might change, what changes to the tax code might be in the works. So if I were you (and I recognize that I’m not) I’d just be covering off the basics right now- how much spare cash do I have every year and how can I divide it between 529 plans for the kids, my 401K/IRA, plus an emergency fund to cover us (i.e. not invested in some exotic instrument, but available to tap for quick cash with a 48 hour or 72 hour window). After that- you just can’t predict what is coming down the pike.

At the moment, some retirement funds are in fact excluded from financial aid calculations. So taking some of the life insurance proceeds and funding a retirement account for yourself is a prudent thing to do. Some colleges will exclude the value of your primary real estate (i.e your house) so perhaps paying down your mortgage could be a prudent thing to do. But again-- only do stuff which makes sense for your overall financial safety and security. If it happens to have a peripheral benefit in terms of aid- terrific. But that shouldn’t be the focus of your planning right now.

Hugs to you. You sound like a model of resilience and what a wonderful gift to give your kids.

5

I am so sorry for your loss. I have a relative who lost her husband the same way, and also on a bike ride.

The schools that give the best aid will use CSS profile and the business will probably mean no aid.

Something seems confusing…yes, you’re paying a CEO what you used to pay your husband, but the business has grown so much…but you’re not getting paid much.

6

We purchased prepaid tuition plans through our state, which allowed the kids to attend any state public college, which turned out to be an excellent investment, yielding the equivalent of a 200% return over 18 years. The plans were valued at far less (the cash-out price) than the cost of tuition. It was always a contingency plan for us to make sure the kids could attend college no matter what our financial condition, and it worked out pretty well.

You will have to value your business for the FAFSA. You may want to check on it, perhaps you can use just the money you originally invested to start it as the valuation, or the NPV based on the cash flow at the time less some discount.

Sorry for your loss. The same happened to my cousin last year (heart attack @ 50)

Whatever you do, it is most important to minimize your income in the year before the kids start college. Do not realize any large capital gains that year- that will count as income and you will have no corresponding drop in assets.

7

The fFsa and Profile forms now use prior prior year tax year information. So this parent would need to "minimize in one TWO years prior to her kid enrolling in college.

Personally, I think making a plan for college savings is smarter than loving on a shoestring budget for years before the kids start college.

Also, for fafsa purposes, I don’t think businesses wothnless than a certain number of employees are considered.

But for Profile they will,be.

The most important thing for business owners to know…there are business deductions allowed by the IRS that are NOT allowed for financial aid purposes and are added back in as income.

Will your income still be $65,000 a year when your kids go to,college?