And the value of the property would be greatly reduced if there is a life estate attached to it.
I’m not so sure about that. FAFSA requires the reporting of the current value of certain assets where the student or a parent is the legal owner or a beneficiary, even if there is a restriction as to how the owner or beneficiary can access or use the proceeds from the asset. A trust is one example of this. For instance, a student must report the current fair market value of a trust of which the student is a beneficiary, even if the student will not see a penny from the trust for years. That is analogous to a situation where the student is the owner of a piece of real estate in which someone else has a life tenancy, and the student therefore cannot sell the property until the life tenant dies or gives up the life tenancy.
Right, but if I have a land worth $200k, it’s easy to value it at $200k. If the same property has a life estate on it, and I have no use of the house for X years (and X is truly unknown because we don’t know how long the life estate will last), it has a lot lower value to me NOW than the land which I have use of now. The land I own outright is worth $200K. I can live on it, rent it out, sell it. The other property I have no use of, can’t live on it or rent it out, and I can sell it but the value would be less because it is subject to the life estate. Would you buy the free and clear land for $200k or the restricted land for $200k?
If you have a house with a mortgage, its value is less than the house you own outright.
That’s a no-brainer, but it’s not what we’re talking about here. OP’s daughter wasn’t faced with the decision that your question puts forward. Here’s a question back at you: would you rather buy the free and clear land for $200k, or accept as a gift a piece of property worth $200k that’s subject to the life estate of the gift giver, who is two generations older than you?
Your points are valid, but the question here is what needs to be reported on FAFSA. It doesn’t need to make sense; it only needs to comply with the FAFSA rules. Everything you say can apply to a trust as well, and a trust must be reported on FAFSA. A student can be the beneficiary of a trust that conditions payment of any trust money to the student on the death of another person, and the full current value of the trust still must be reported on FAFSA as a student asset, even though it’s unknown when the student will receive any of that money. That’s the same situation that a student owner of real property faces when another person has a life tenancy in the property.
@BelknapPoint – the issue that the land value is fair market value, and real property subject to an encumbrance is ntot marketable-- or certainly not marketable for the same amount as unencumbered property.
Can the daughter go to a realtor next week and put the property up for sale? If she is a full legal owner, she can – but if there is life estate or other limitation, such as a trust interest or lien, then she can’t.
Assuming that there is a life estate, would she be able to sell her remainder interest? Yes she could, but it’s fair market value would be substantially less than the value of property held in fee simple.
This is a math problem. Here’s an example of a formula to figure it out – https://www.dcf.state.fl.us/programs/access/docs/esspolicymanual/a_17.pdf – this appears to be a document used by the Florida Department of Children and Families when they run into these sorts of issues. (Lots of government agencies need a way to figure this stuff out; this is also something that probate lawyers and courts need to deal with regularly). The problem is that I don’t know the provenance of the document I linked to – other than it seems to be something from a policy manual used to calculate eligibility for various state benefits. I don’t know if this is a Florida-only calculation, or if this is derived from a common source that would be used by actuaries and accountants in other states. But it provides an example.
Let’s say hypothetically that the current fair market value of the property is $200K and that the grandfather does hold a life estate, and that he is 75 years old. Under the Florida table, the daughter’s remainder interest would be determined by multiplying property value by .47851 (the corresponding value from the table), which would be $95,702. The OP said something about the brother being a 50% owner - if that’s the case, then the daughter’s interest would be $47,851 and that would be the amount put on the FAFSA.
I think that the OP really needs to figure out the details of ownership, rents, etc. — and probably get an accountant to do the math and make sure it’s being done right. Maybe the grandfather already has an accountant doing his taxes who can help. There are all sorts of issues that need to be straightened out… and a starting point is to pull up property ownership records-- these days, a lot of that info is often available online. It sounds like the grandfather has done something with the best of intentions that might have made a mess for his grandchildren in terms of college financial aid, but also could have other adverse tax consequences as well so time for the parent to figure out exactly what is going on. If grandpa has a life estate then it is fine for him to collect rents – but if just deeded the land over to the grandkids and kept right on collecting rents without doing the proper paperwork – then that would present a different set of problems. And even though I am assuming good intentions, there could be bad ones - if the grandfather has significant unpaid debts and deeded his property over to his grandkids as away to shield it from creditors,… well that would a whole different story.
If a life estate works the same as a trust…then it does not matter if the “owner” can sell…or not. What ,alters is the value of their share of the property for FAFSA purposes.
We went around in circles about a trust…and it was very clear that both we parents, and our kids would have to list our share of the trust as beneficiaries…on the fafsa. And this trust was real estate that really had NO potential for any earnings…and the trust was written such that 100% of the beneficiaries would have to to agree to dissolve…and even then, there was a legal dance to do.
We declined to be part of the trust (a very valuable piece of real estate located in a place we never go to).
So…it’s very possible that even though this student has no access for sale purposes…that the value still needs to be listed on the FAFSA.
Will you please tell me where are the FAFSA instructions that inform us that this is the way to calculate a future or remainder interest in an asset for reporting on FAFSA. Because when a student or parent is the beneficiary of a trust where access to the trust money won’t happen until some time in the future (a not uncommon situation), as far as I can tell there is no FAFSA calculation involved to determine the future or remainder interest. Instead, the current value of the trust is reported, even though the student or parent might have no present interest.
Yes, it may be done differently for probate or for the Florida Department of Children and Families, but we’re talking about FAFSA here. Admittedly, I have no personal experience with reporting on FAFSA the value of a real property asset that is subject to a life estate. But I have completed a FAFSA that reported a trust as an asset, and there is no distinction between trust assets that are immediately available and those which will not be available until some undetermined future time.
Thank you all. You are all very helpful but we’re veering off into trusts and the suspicion of schemes.
If it helps with laws…
State: Alabama
College: Auburn (probably)
This is what I know now - real numbers:
Her half of the value of the land is ~$40,000. I wrote it down yesterday after looking at the 2017 appraisal of the property. Do I put that number on the FAFSA form? Do I have to double that value (~$80,000) since it’s equally shared between her and her brother?
Is it even worth it now?
My daughter should get a full tuition scholarship based on her ACT, etc., but we’ll still have to pay housing as she missed a presidential scholarship by one point.
Does the FAFSA only cover tuition or would it help cover her on-campus living expenses too? I suppose I need to figure that out first to know if I even need to pursue the FAFSA application.
It’s looking like her brother may not be so fortunate and may need much more financial help in several years. Might it be possible for them to just give the land back to their grandfather?
This is not a trust. I specifically asked. This is good intentions gone bad. His rationale was to gift them the property so they could sell the land if they had to in order to cover college expenses. My dad is one of the most generous people you will find, so any insidious or nefarious schemes aren’t at issue here.
My dad is putting the rent money in a separate farm checking account to be pulled from by/for my kids when they go off to college. He’s got lawyer(s) and attorney(s) who have arranged this but at this point I’m wondering how clever they were if they dug this kind of hole for us knowing two grandkids would be attending college.
My daughter and her brother can put the property up for sale any time they like. Nothing is locked in. The rent money is not much at all and neither is the crop sharing income. This is just a flat rectangular patch of dirt that’s been in the family a touch over 200 years and I’d like it to stay for another 200 years.
On FAFSA, use the value of the land as of the day that you complete the form. Was there an appraisal done in 2017? If so, that value will work fine. Or are you talking about a 2017 tax assessment, which is not the same thing as an appraisal and is not often an accurate reflection of fair market value. If the property is equally shared between your daughter and her brother, you would report on your daughter’s FAFSA one half of the current market value (assuming the property is not mortgaged).
FAFSA needs to be completed for any need-based aid, and some schools require it for consideration for merit aid. Money awarded through FAFSA can cover the full cost of attendance, including room and board. If your daughter wants any federal student loans, she must submit FAFSA.
Yes, that’s possible, but it involves many other considerations as well.
So it sounds like there is no life estate involved. That likely means that the income from the land belongs to your daughter and her brother. If so, they should be reporting it as income on their tax returns, and it needs to be reported as income on FAFSA. For tax purposes, they should also be able to offset at least some of the income with the property tax paid, if deductions are itemized. Of course, the lawyers may have concocted an arrangement that doesn’t make things this simple.
It may not matter at all for FAFSA purposes, as you (parents) may have income and assets that put the children beyond any federal money except unsubsidized loans, which they can get with out without owning the property.
As mentioned, you definitely should do the FAFSA. The form itself doesn’t give you any money, but it is necessary for federal aid or loans, and schools use its Expected Family Contribution (EFC) number to see if your daughter is eligible for any need-based aid.
The basic question is whether adding this property to the FAFSA will make any difference between getting a need-based grant or scholarship from somewhere like Auburn or not. Looking on the Auburn web site, it looks like they only give such grants to people with very low EFC numbers (as in, under $5000) who are eligible for federal aid like Pell Grants. This should be verified, though.
One thing you could do is try the online FAFSA EFC calculator both with and without adding in a $40,000 property owned by your daughter. See what EFC numbers you get. If they are pretty low, but the one with the property is higher, the property could make a difference. If they are relatively high (like $10-15,000), maybe you don’t have a chance at need-based aid at an in-state school anyway. Once you have an idea of your possible EFC numbers, you could call Auburn financial aid and ask if a student with a merit scholarship and those EFCs has any chance of getting more money. If so, then see what you can do to lower your EFC (which could include transferring the ownership.)
Looking elsewhere at Auburn’s web site, it looks like maybe you’re talking about the Founders scholarship (30-32 ACT, 3.5 GPA) which pays $8000 a year, which is most (not all) of tuition and nothing for fees or room or board. Auburn costs about $24,000 plus books and personal expenses, so that scholarship leaves about $16,000 to be paid to Auburn. (With a 33 ACT, the Presidential does pay the full tuition, so that’s another $1000-2000 a year. If so, maybe your daughter could try the test one more time.)
The really basic question is how affordable a school will be after any scholarships or grants. It might be you would need to sell the property anyway to pay for school at all, or at least to avoid having your daughter or son take out loans. It also could be that you will want to use the property more for your son if he won’t get as much in merit scholarships. If they both end up with a good education and hopefully no or little debt, that would seem fair to me.
If she qualifies for the full tuition scholarship, does she still have “need”? What does the NPC say?
Well that’s that. I filled out the form and submitted. EFC is a few dollars under $24k, so I must assume that is not exactly good. Somewhat ironic, considering we don’t even have anywhere close to $24k in the bank or anywhere else.
I will go back through and click ‘helpful’ stars for all who helped and then I shall take a long soak in the pool of deep regret for not becoming a doctor or lawyer when I had the chance so many years ago.
The next step, after a long bath is to start formulating plan next. Filing FAFSA allows each child to take a ~$5500/year federal student loan. If your daughter qualifies for guaranteed merit anywhere, that’s good for you. Figure out how much you can pay for each child without taking on debt. Can your son prep for the ACT/SAT? Are there commuter schools near you? Once you know what you can pay and what your kids’ stats are, let us know. We may be able to suggest something.
At the risk of sounding blunt, I will point out that this contradicts something you said in an earlier post:
My interpretation is that the gifted land as a FAFSA reportable asset and the income it generates as FAFSA reportable income have increased your daughter’s FAFSA EFC to an amount that your are not able to meet with current liquid assets. But according to what you posted earlier, the cause of the higher EFC can also be used to help cover college expenses. If the property is sold, your daughter’s share of the proceeds can be used to help pay for school, and this will also result in a drop in future EFCs because some or all of the asset is no longer reportable (depending on how quickly the proceeds are spent).
You also stated earlier that the income generated by the property is available for your daughter’s use. Approximately how much of this income is available for school expenses now, and how much new income do you anticipate will be coming in every year?
It seems to me there is not enough information yet. How does the grandfather lease the land if it is owned by the grandchildren? What is his legal interest in the real property? Something is missing. Who signs as the lessor? Is there a real property power of attorney?
^^^
Good questions.
All sorts of possibilities. Remember, he set this up via an attorney.
How much is Auburn expecting you to cover, after the full tuition scholarship?
If the children are the landowners, then there should be an annual statement being sent to them about rentals – typically a 1099-Misc. This is required unless total annual rental income is less than $600. It is fine for the grandfather or his lawyer to handle all of the administrative stuff of collecting rents and paying taxes, and it would even be customary to deduct legal & management fees as an expense out of the rents-- but the 1099 would report the gross amount collected, and then the expenses would be itemized on a Schedule E. But the parent should have been receiving an annual statement with an itemization along with the 1099’s for each child, so that the tax returns could be properly completed.
So unless “not much at all” is under $600 gross rental income… there is income that should have been reported and accounted for on tax returns in the past.
It might truly be insignificant for purposes of FAFSA – for example,if there is $3000 annual rental income, but after payment of property taxes and various other expenses there is only a net of $500 – the FAFSA income to report for the child would be the net of $500 and that is not going to make a significant difference for EFC…but it is still something that should have been reported on tax return for past years, since whenever the grandfather gifted the property.