Hello - I have a question about how to understand the rules governing reporting a trust asset.
Student’s single grandparent settled an irrevocable trust 5 years ago by putting two pieces of real estate (total present value less than $500k) into ownership of the trust. Grandparent’s disabled son (age 44) (student’s uncle) is the primary beneficiary of the trust. On death of disabled son, secondary beneficiary of the trust is student’s parent (disabled son’s sibling).
FAFSA Handbook states: “Trust funds in the name of a student, spouse, or parent should be reported as that person’s asset on the application, generally even if the beneficiary’s access to the trust is restricted.”
My question is how, if at all, the secondary beneficiary asset should be reported. The Handbook suggests that it should be the net present value of the asset, which it describes as “the amount that a third person would pay for the right to the asset.” How would one go about determining the proper amount to assign to that? If the trust works as intended and the disabled son inherits the houses upon the death of grandparent, the secondary beneficiary’s position is worth nothing. Could it possibly be that the family is responsible for hiring a professional assessor or accountant to attest to that? Or is there a more reasonable way?
To clarify, the Trust states that “Upon the death of the Grantor, the remaining principal and any undistributed income of the Trust shall be paid to or for the benefit of [disabled son].”
So if Grandparent dies and disabled son is still alive, the Trust would be dissolved without any benefit to the Secondary Beneficiary / Student’s parent.
Should read:
To clarify, the Trust states that “Upon the death of the Grantor, the remaining principal and any undistributed income of the Trust shall be paid to or for the benefit of disabled son.”
The trust fund doesn’t pay out unless & until the grandparent dies, and the grandparent is still alive, correct? This isn’t the asset of the second beneficiary until two people die. Not reported on FAFSA.
Yes - that is correct. Thank you for your response. Is this just a working understanding of financial aid officers, or do you know if it is memorialized in guidance anywhere?
The trust you are talking about is not the kind of trust to which the financial aid guidance refers. That kind of trust belongs to the beneficiary now but only pays out according to some particular schedule (for example, x amount per year or no money before the age of 35). In such a case, the money belongs to the beneficiary, even though they can’t actually access it (all or at all) now. But they could borrow against it, which is why it’s reported on FAFSA. In the disabled son’s case, if he were the student for FAFSA, he probably wouldn’t have report (unless I am misunderstanding the type of true - I am assuming it’s inherited, not currently his), because he doesn’t own anything … it’s a promise of something he could get, if it’s not all gone, when person leaving it to him dies. And the second beneficiary is not in line for anything … he would only get it if the beneficiary dies.
I could be misunderstanding the trust, and it is possible that the disabled son would have to report on FAFSA. Here is a pretty good explanation: Trust Funds and Financial Aid - Finaid. But for you, that doesn’t matter, because you’re concerned about a secondary beneficiary.
Even if I am misunderstanding the type of trust, and if the disabled son would be expected to report it on FAFSA, the other son still won’t have to. His is a “maybe might” situation, definitely not a for sure situation.