Effects of Receiving Inheritance on Fin Aid

Paying for College
1

<p>I have an aunt who died and who we will likely be receiving some $$$ from in 2010. </p>

<p>Surely this question has been asked before, but I'm not easily finding thread info about it.</p>

<p>How will this effect our EFC next year? Is it seen purely as income?</p>

2

<p>I’m sorry about your aunt’s death. Did she pass away in 2010? If so, her estate will not owe any federal taxes. </p>

<p>Inheritance is not usually taxed as income to person who receives the property. However it will be an asset that you’ll need to report on next year’s financial aid forms, assuming you don’t spend it or gift it in the meantime.</p>

3

<p>Unfortunately, if you still have the money when you file FAFSA next year, it will count as an asset unless it’s in a protected account (ie retirement). I checked the FAFSA instructions and inheritances are not specifically included or excluded from the definition of untaxed income…maybe you could call the FAFSA help line?</p>

4

<p>Thanks, she lived a good, long life of 95 years. :)</p>

<p>She died in later 2009, but all will not be settled till this year.</p>

<p>So if we put some $$$ in a retirement account, it’s “safer”? Or if we spent it? </p>

<p>Not trying to do anything tricky here, but also don’t want to be penalized for it! Our plan, we think, was to do some home improvements, and yes, save some for retirement.</p>

5

<p>Well, FAFSA doesn’t consider retirement accounts or home equity in the asset calculation so those are good choices! But even bill paying or a new car would be “blind” uses and the asset values that are reported are based on the day you file FAFSA. So, you don’t have to use it by the end of 2010, just by the date you file. Depending on what your age(s) are, you may or may not have some asset protection allowance left to shield any cash remaining. This document has a table showing the allowances (page 19):
<a href=“http://ifap.ed.gov/efcformulaguide/attachments/111609EFCFormulaGuide20102011.pdf[/url]”>http://ifap.ed.gov/efcformulaguide/attachments/111609EFCFormulaGuide20102011.pdf&lt;/a&gt;&lt;/p&gt;

6

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<p>You will need to check with your retirement folks. There IS a limit on the amount you can contribute annually to some types of accounts. If it were me, I’d discuss this with someone knowledgeable about what to do to invest inheritance monies.</p>

7

<p>If you are at a FAFSA school you could also pay down your home mortgage and have that be protected from the EFC formula</p>

8

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<p>The primary residence is NOT even reported on the FAFSA. BUT if you use the money to pay down the mortgage on your primary residence…or to pay any other consumer debt…it will not be sitting in any other kind of bank account to be counted as an asset on the FAFSA. </p>

<p>I think the above poster is saying that if your kiddo goes to a Profile school, home equity on your primary residence is used as part of the formula to a greater or lesser degree. Therefore, if you paid down the mortgage, your equity would be higher. This would be true…but you would want to check and see the %age of home equity that YOUR kid’s school uses in the financial aid formula…it goes from nothing to all.</p>

9

<ol>
<li>An inheritance is not income.</li>
<li>The inherited assets are assets that must be reported on the FAFSA.</li>
<li>An inherited IRA is generally a protected asset and does not affect the EFC.</li>
<li>If you’ve inherited an IRA and then withdraw funds from it, the withdrawn funds are income on your 1040 and could have an impact on your EFC.</li>
<li>You can’t just drop inherited money into an IRA; you have to follow all of the IRA contribution rules (maximum contribution rules, etc.)</li>
<li>Paying debt with an inheritance, especially disfavored debt like credit cards is a sound financial strategy because your credit card rates are likely higher than any other anticipated rate of return. But you have to have the discipline to avoid running up new debt.</li>
<li>Paying down a home equity line or mortgage is less beneficial than #6 but is a method of rolling the inheritance into a protected asset that will not ordinarily affect your EFC.</li>
<li>Because lenders are shutting off access to HELOCs, it might not be wise to pay down a HELOC because you might lose the ability to access it in the future.</li>
</ol>

10

<p>Check with the executor. They may be able to delay distributing the assets until 2011, which would remove it from next year’s financial aid if you time the forms right.</p>

<p>Otherwise, as an asset, at most 5.6% of the amount will be added to your EFC.</p>

<p>You can’t dump the inheritance directly into an IRA, but it might allow you to fund an IRA or 401k from your current income if you are not already contributing the max to those. You could also buy an annuity or lump-sum whole life insurance policy with will also remove the asset from FAFSA.</p>

11

<p>Not likely to delay until 2011 - she died Sept. 09 so it’s already been awhile…</p>

12

<p>If the amount to be received + your other assets <= asset protection allowance, nothing changes.</p>

<p>If the amount to be received + your other assets > asset protection allowance, there will be an impact unless the money is legitimately shielded. If the amount in question is under $50K, you might not need to do much at all.</p>

<p>But if it is a more significant sum, my suggestions for things you could do in the order I’d generally think about them:

  1. Top up your “rainy day” account so that the amount is at least close to the asset protection allowance;
  2. If you have short-term debt (credit card debt, car loans, or home equity loans for example), pay it off: this has the added benefit of freeing up money that you can use either for meeting the college costs you’re responsible for, or allowing you to more quickly pay down longer term debt, such as a mortgage;
  3. Fully fund a Roth, or a non-deductible IRA for each of you. This should not affect your EFC since neither is deductible. If your retirement savings are weaker than you’d like, see if your employer (or your spouse’s employer) will allow mid-year increases in 401K withholding and increase it to the max – it will increase your EFC, but maintaining retirement savings is probably more important than the relatively small hit your EFC will take even if you contribute the max.
  4. If the sum remaining could either pay off your mortgage or if your mortgage has a payment that adjusts each year (or more often) where paying down the principal means that the corresponding loan payment is reduced, pay off what you can manage. (Paying down a fixed rate mortgage just shortens the remaining years to be paid, it doesn’t reduce the amount due in the intervening months – not necessarily a bad thing, but maybe not the way you want to tie up money.) For many families, not having to make a mortgage payment could be the difference between being able to cope with an EFC of $20K-30K or having that be hopeless. If you’ve got a fixed rate mortgage, the calculus is a little more difficult. For me, I’d rather hold a chunk of money in cash (knowing that it will be assessed for FAFSA) and use some to pay down the fixed rate mortgage even if I can’t pay it off.
  5. If you or your child already took out student loans, pay them off.
  6. If there is still money left, unless the house is in substantial need of a new roof or new heating system, or the car is on its last legs (at which point I’d say go ahead and replace it) – I’d look at just leaving it in the bank. It will be assessed for FAFSA purposes, but if you’ve done the #1-#5 things and there is still a big chunk of money left, then paying for school should not be a worry. If there’s not much money left, then the impact on your FAFSA EFC should be minimal.</p>