This is a rather technical question, but…
If my grandchildren are named as beneficiaries of a trust upon my passing, will that future inheritance affect the assessment of their current need on financial aid applications like FAFSA?
FAFSA doesn’t ask about potential future inheritances.
If your asking about a testamentary trust (a trust that is created through a will and comes into effect upon the death of the testator), the answer is no, there will be no effect on a potential beneficiary’s need-based financial aid until you die and your grandchildren become actual beneficiaries. After all, until the day you die, the will can always be changed.
But if you die and even if those trust assets are inaccessible to the kids for years, they are assets.
Or, if a student’s parent(s) are beneficiaries of a trust, but won’t have access until years after the student graduates college, it will still be a parental asset on most aid applications. Not as detrimental as a student asset, but stiill…
If they are remainder beneficiaries on an existing trust, they do not yet own the assets, so it would not be listed on FAFSA. However if they are listed as anything other than remainder beneficiaries, such that the assets have been passed legally to them (to protect from 5-year lookback, or to remove from the estate for example), then they would have to be listed, even if they can’t access the funds.
@CTScoutmom may you please clarify a bit for me? I’m a beneficiary of a trust which has as a condition that each beneficiary receive their portion of the trust assets upon reaching a specified age. Currently, the assets are owned by the Trustee, who is not one of the beneficiaries. No interest distributions. Where does that leave us beneficiaries vis a vis the FAFSA, in your experience? Thank you.
The assets are owned by the trust (a legal entity), not the trustee (just clarifying that point),
Folks…trusts can be written in a lot of different ways. Unless one knows then provisions of the trust, it’s impossible to give advice here.
I will say, if your kiddo, or you are the beneficiary of a trust, it’s possible that the amount of your share of the trust will be treated as an asset for financial aid purposes…whether you have access or not. Our family has a cottage that the inlaws put into trust (fortunately we were given the option to decline…and did). The way OUR family trust was written was such that both our parent shares and our kids shares of the value of the trust would have been assets. We would have had NO access to this huge value, as it’s real estate.
In some cases, trusts are written so kids or parents won’t have access until a certain age. That doesn’t matter either. It’s still your asset.
But again…it depends on how the trust is written.
@intparent Well, actually, no. Setting up a trust involves a settlor transfering ownership of assets to a trustee, who must manage those assets for the benefit of the beneficiaries. And yes, I agree it depends on specific trust wording.
OPdescribed a trust that would pass to beneficiaries after his/her death. When ownership or shares pass on, as we’re saying, even if it’s written that kids don’t have access to the money in the trust, (say til age 30,) it’s an asset. It sounds counterintuitive, but fin aid sees it as an asset, even if X has no access to the funds.
This has come up before with, farms, land, or real property, even though, in many cases, it can’t be sold (or not yet.) And yes, in the case Thumper mentions, the assets would have passed to parents and kids at time, not on someone’s death.
The assets belong to a person (or a corporation) - not “the trust.” The trust is treated as its own entity for tax purposes, but even then it may be structured such that income is “passed through” to the beneficiaries. Trusts are often created to protect assets - to avoid higher taxes if the money is otherwise part of an estate, or to keep from having to spend everything in the estate before Medicare will kick in to help with nursing home costs (and a variety of other reasons).
If you get a K-1 statement each year from the trustee, to report on your taxes, then you are a named beneficiary, and a portion of the value of the trust belongs to you - as stated above, even if you can’t access those funds. They are a non-liquid asset. If you don’t that doesn’t necessarily mean you’re safe, it just means nothing passed through. There are many ways to set up a trust, each with different benefits.
@TdoesCollege most likely those are your assets, but check with the trustee. Again, if you get a K1, listing a share of the income to be shown on your own tax return, that’s a good indication that you will need to report it.
@CTScoutmom Thank you. I wish asking the trustee was an option. Getting answers from the trustee is (almost? mostly?) impossible. It’s a very annoying situation, as we’re not getting accurate, or timely, asset information to put on the FAFSA, and won’t have access until years after kiddo is out.
Your trustee is not meeting fiduciary responsibility. I hate that the litigiousness of our society, but it might be worth pressing the matter - if the trustee isn’t providing appropriate information to the beneficiaries, what else isn’t being done? How do you know if what is ultimately your property is being managed properly? Is your trustee just incompetent, or do you think there may be funny business?
No and no. intparent in post #7 is correct. The trust is the legal entity that owns trust assets. The trustee is charged with managing those assets under the terms of the trust document; the trustee does not own the assets.
And adding @BelknapPoint will correct me if I’m wrong…
The beneficiaries are the ones who might need to declare their value of the trust for financial aid purposes. The trustee might not be entitled to any of the actual trust value. BUT all of this depends on how the trust is written, and what kind of trust this is.
@thumper1 yes, that’s the bit that’s hard to swallow, some days.
“The essence of the legal relationship known as a trust is the separation of legal ownership of assets from beneficial ownership of those assets. The trustee is the legal owner and beneficiaries are beneficial owners.“
http://theconversation.com/beware-the-pitfalls-of-the-discretionary-family-trust-11224
OP, you need to ask your lawyer who wrote the trust or one who has a copy and can make an informed opinion not folks on CC.
It’s hard to say…because need based aid is largely based on the income the parents have…and at some colleges, family incomes nearing $150,000 or more per year can still get some need based aid.
Assets…assets in the student name for FAFSA purposes are tapped at 20% of their value. Assets in the parent name are 5.6% of their value…now. For Profile schools, these amounts could be different.
In terms of loans, the Direct Loans ar available now to any kiddo whose family completes the FAFSA form.
As you noted, most merit aid is not related to financial need…but SOME merit aid does have a need component.
Do you want your grandchildren to have money available to them to help fund their college educations? If so, can you start a 529 account now?
And how much are we talking about here (you don’t have to tell…but think about this). Is the amount you will leave them sufficiently large that it would really have an impact on their ability to get need based aid.
Some families do a lot of financial gymnastics when really the kiddo wouldn’t have gotten need based aid anyway.
The loose cannon here is…you are talking about some unable to be determined time in the future. The landscape of financial aid could change, as well as the income and assets of the kiddos’ parents.
And also…why wouldn’t you want your inheritance to them to help fund college? If the money you leave them precludes more need based aid…they could use your gift to them to offset costs.
What’s the question? Are you asking whether you can structure it in a way so that the colleges won’t notice the money you left them and the grandchildren can still get financial aid? What is your children’s household income? Your grandkids may not be eligible for FA anyway, even without the money you leave them.
The only “grants” are Pell grants, which are only about $6k a year and are for low income students, and institutional-based grants at colleges that have money to give. Not all colleges do. Very generous colleges – generally the most selective, like Ivys and similar – give grants sometimes to students from households with $150k or more income. It also depends how many children in the family will be in college at the same time.
Anyone, regardless of income, can get a student loan.
Income has no impact on merit aid.