Financial Aid advice/advisor needed: inheritance

Paying for College
1

<p>Here's the situation:
I am 58, married, two children.
My wife and I worked for a non-profit for about 18 years making very little. Have been away from that for about 8 years but still making very little, about $37k/year combined.
We each have a small 401k from previous employer and moderately small Roth IRA's.</p>

<p>Child number 1 will be a sophomore at a 100% needs met private university this year. We had a very low EFC and paid very little last year and so far this year. Child 1 is flourishing there, perfect school for them. Very, very thankful for how their life is turning out.</p>

<p>Child 2 is a senior in high school this year with very similar credentials to child 1, maybe a little more serious and better student. We're in the homestretch of determining where they'll go.</p>

<p>We have never owned a house, always rented.
No debt and haven't had any for over 30 years.
My wife and I each drive 10 year old cars with no budget to replace them. They are decent cars but at their age anything could happen. We could buy new used vehicles but don't have to.</p>

<p>So here's the challenge: a relative died recently and we stand to inherit a decent sum, about 300 to $400k. The exact amount is unknown. The executor of the will told us they were willing to delay the receipt of the inheritance until after the first of the year which will help us tremendously. The next FAFSA and CSS Profile we file will be for when both children will be in college.</p>

<p>To help move this inheritance to a more sheltered position we are seriously considering buying a house and have been looking in the 200 to 225K range. Not a "starter" home by any means but then again this is our first and possibly our last house we'll buy. </p>

<p>We plan on fully funding any retirement vehicles we can. Best I can see is that would be $6K/each for both 2012 and 2013 into our Roth IRA's. I don't know of any other retirement vehicles we could instantly fund. Possibly roll my current paycheck into a 401k and live off the inheritance for a bit but that takes time. We don't have the ability to start doing that now as we are tapped out. (Last year I withdrew $4000 from my Roth IRA just to make ends meet). </p>

<p>So if we were to buy a $225k house and move $24k to Roth IRA’s that would still leave about 50 to $150k liquid. </p>

<p>Add to this that child 2 has the desire and credentials to go also to the same school as child 1. Their best chance would be to go ED. But with our finances in the state they are in I am hesitant to committing to that. This is the first time in our lives that we will not be living at the edge of our means and I don't know how much a 100% needs met school would want from us each year. That may sound selfish. I'm willing to finance my children's education but it would be tough to be at the school's mercy as to how much if we were to send child 2 to a needs-met school. It's a pretty pricey school that I don’t think I could afford half of.</p>

<p>I am not asking how to do something illegal, just how to be wise about this. </p>

<p>What advice would you give?
How does one go about finding a qualified and knowledgeable financial aid advisor? </p>

<p>I appreciate your time and advice.</p>

<p>Thanks,
Twiceblessed</p>

2

<p>I am usually skeptical about financial aid advisors, but your case definitely sounds like a good one will be worth the investment. It sounds like you already know this, but remember that good tax advice and good financial aid advice are often very different - perhaps even direct contradiction.</p>

<p>First, definitely wait until January to receive the inheritance. That way C1 will only have its impact for one year of FA and C2 will have his/her base year calculated without the impact.</p>

<p>A couple suggestions to investigate: </p>

<ol>
<li><p>If the inheritance is currently in the deceased relative’s retirement fund, roll it directly to an IRA in your name and you should be able to keep it out of FA calculations. You can then take it out without penalty after C2 graduates (you will already be 59.5 years old at that point).</p></li>
<li><p>Consider a variable annuity with a reputable firm. This should allow you to invest the full amount in retirement vehicles that are outside of FA. However, there are unfortunately pretty steep fees associated with this type of account.</p></li>
<li><p>If you will not need the $50-150k, you can use a big chunk of it to buy a single-premium life insurance policy. It sounds like you and your wife live pretty simply so you may never need most of the money after buying a house. If this is the case, life insurance will allow you to pass a larger amount of money to your children later and avoid losing FA now.</p></li>
</ol>

3

<p>If the money is in an IRA, you can have it converted to a Beneficiary IRA. The last time I researched this, the beneficiary (you/spouse/kid) would be required to take minimum annual withdrawals based on their own life expectancy. So yes it would increase your annual income a bit, but probably not by much. The beneficiary also does have the option of pulling out more than the minimum if/when that becomes necessary or desirable.</p>

4

<p>FAFSA provides $58000 in asset protection for a 58-year-old married couple. Profile should provide something similar. Assuming you have minimal other non-retirement assets (which it sounds like), you may only owe 5.6% of $100K or so for three years, that’s not so bad.</p>

<p>You may not need to worry about it all, depending on how much you will have left.</p>

<p>You will need to check how the school treats house equity. Some schools count it as an asset, some don’t, some count only some, some cap it at a multiple of income, etc.</p>

<p>Supposedly some Profile schools will give you a break on your non-retirement assets if your retirement assets are really underfunded.</p>

<p>Assuming the school doesn’t count (or limits how they count) house equity, you could always spend the whole amount on a more expensive house than you need, and then downsize in three years.</p>

<p>And you will be able to make three years of retirement contributions, not just two.</p>

5

<p>Rmldad: Thanks for the suggestions.
The inheritance is not in an IRA. It’s a trust of some sort that I’m still trying to figure out. I’m looking into if I can trickle the money out of the trust a little each year rather than taking it all at once. From what I understand some of the money will show up as income and that’s where I don’t know how it will affect my FAFSA and CSS. I probably need a good tax attorney (yikes!).</p>

<p>I’ve always heard that annuities were not a wise move but that was years ago when they first came out. I’ll look into that.</p>

<p>notrichenough: Thanks also.
Is there a “FAFSA For Dummies” book or primer? How do you get to know some of the numbers like the asset protection? </p>

<p>How would I find out how a school handles home equity? Just ask them?</p>

<p>The end result is I may need a good college financial aid adviser. What’s the best way to find one (I"m supposing locally)?</p>

6

<p>You might search this site for people’s experience with how they have seen an inheritance treated. IIR, some people think it should count as financial aid income in the year it is received, others disagree as it is not taxable income. Any assets purchased with the funds would be declared as usual.</p>

<p>If there is income from the trust stemming from some base amount invested and that shows up on your tax return, you may have some questions to answer. Can you ask the school’s policy anonymously?</p>

7

<p>

Use the EFC Formula Guide, this will show you exactly how your FAFSA EFC is calculated:</p>

<p><a href=“http://ifap.ed.gov/efcformulaguide/attachments/010512EFCFormulaGuide1213.pdf[/url]”>http://ifap.ed.gov/efcformulaguide/attachments/010512EFCFormulaGuide1213.pdf&lt;/a&gt;&lt;/p&gt;

<p>

Some schools put it on their financial aid web pages, some will tell you if you ask. Some will not say.</p>

<p>If you are comfortable divulging the name of the school there may be people on CC who have experience with that school that can tell you.</p>

8

<p>Also, check the Net Price Calculator for the school, it should be on their web site somewhere. You can experiment with different numbers to get an idea about how they are going to count various assets. If you are lucky they will have a separate line for house equity.</p>

<p>I think you should really consider your own long-term financial future first. If buying a home is the right decision for you and your spouse at this point in your lives, then you should do it for that reason, not to try to shelter an asset from a college. If you need those assets to be liquid for retirement or channeled into normal retirement vehicles, then you are better off doing that, even if it costs some in college expenses. Don’t let the tail wag the dog.</p>

<p>re financial aid advisers: I met with a person who claimed to be a financial aid adviser. His big idea was to suck out every penny of house equity I had and buy (from him) some sort of life insurance/annuity product that he claimed would shelter my money from the school while still allowing me to access it. IOW, he was really an insurance salesman. So beware.</p>

9

<p>“Don’t let the tail wag the dog.”</p>

<p>Always excellent advice!!</p>

<p>Years ago, I picked up a copy of Personal Finance for Dummies by Eric Tyson. The big take-away lesson for me was that I should focus on our over-all family financial situation, and then fit the college finances into it. Another personal finance author that I like is Michelle Singletary. Chances are your own public library has some of her books.</p>

<p>Wishing you all the best!</p>

10

<p>happymom has hit the nail on the head!</p>

<p>What would you do if this inheritance didn’t exist? You would continue living the way you have been, nothing would change.</p>

<p>Now look at what happens with your inheritance, and your possible options:</p>

<p>Since it is not currently in a retirement vehicle (IRA or 401K) it cannot be rolled into another such fund. Instead, it will be a regular investment. The value of that investment will be an asset, and any income derived from it (interest or dividends) will be income.</p>

<p>I can’t tell you how your school will treat either, but with the FAFSA, you would prefer assets over income. You will have an asset protection allowance as well as income protection. Once you are beyond those, they will expect roughly 6% of your assets, which will be split between the 2 kids while both are in college. That may be as high as $20,000 each year. You can protect a portion of that by buying a house, but profile schools may treat it differently.</p>

<p>I would advise against consulting a “tax attorney” and instead look for a financial planning advisor - preferably someone who is paid to work for you, not based on commissions. A Tax specialist knows about taxes, and can tell you the tax implications of any decision you make, and will know about education-related tax breaks, but is less likely to be familiar with financial aid. If you can find someone who is familiar with Child 1’s college in particular, that would be helpful.</p>

<p>Your first step might be to talk to the financial aid office, and simply ask the hypothetical question of what happens when you gain this asset. It’s not a particularly unusual question, because we all have elderly relatives, and some have more money that we realize. The college could at least give you a sense of how THEY treat sustantial assets.</p>

11

<p>Thanks everyone for the advice so far. I really appreciate all the help. This website is so helpful.</p>

<p>I searched for “inheritance” in this forum and have some reading to do.</p>

<p>I’ll investigate the net price calculator on the school website and see if I can learn something there.</p>

<p>Most of my angst is the timing of all this. With C2 in the middle of the application process I’m trying not to limit their dream schools while I investigate how all this will shake out.</p>

<p>I tend to want to know all the answers before I jump. That can be both good and bad. We’ve lived a great life so far. I’m sure we’ll be fine.</p>

12

<p>Congratulations on your inheritance! Try to ignore your angst about the application process for C2. Do it just as you would have without the inheritance. You did well with C1, so hopefully C2 will have some good choices too. Putting off getting the bulk of the inheritance until after you have filed FAFSA (Jan 2013) is essential and it sounds like you have already arranged this. There may some income from the trust this year as well as next depending on how the money is invested, but it is likely not to increase your income tremendously. The estate’s executor will tell you how much it is and you will file it as income on your taxes. The inheritance will be an asset on your FAFSA and profile, but assets are assessed at a much lower rate than income. As mentioned above you have asset protection and most meets needs schools are at least as generous as FAFSA on asset protection. Buying a house is probably your best investement, since FAFSA doesn’t even count equity and most profile schools have a reasonable amount of equity protection, but don’t rush it. You will have until the end of 2013 to buy one. Don’t buy more house than you need and pay for it 100% in cash. I don’t know where you live, so I don’t know if $225K buys you a mansion or a shack. Out of a 300-400K inheritance that is on the high side of what I would invest in a house. You will save on rent, but you will still have property taxes, utilities, insurance, up keep and repairs. With a 37K/yr income decreasing your monthly housing costs will make things easier. Also you will soon be empty nesters and approaching retirement. You may want to sell the house once both kids are out of school, so make sure it is in a good location and is the type of house that will appeal to most buyers. Contributions to retirement accounts are added back to income for financial aid purposes, so although it will help on the asset side, it won’t decrease income. You and your wife can put up to 17K + 5.5K catch up (over 50) into your current employers 403B or 401K plans each year. Plus 6K each into your Roths. Providing for your future retirement is a good idea at this point in your life, even if it won’t help tremenously with financial aid. The “trickle out” of a trust idea doesn’t really exist. The trust is an asset whose value you can’t legally hide. The income you make from the trust can vary widely depending on what the assets are. Cash makes little income, rental properties or a business may make a lot of income and stock and bonds are likely intermediate in income. You can change the trusts assets to adjust the income level to be lower until your kids are out of school. Although 300-400k is a lot of money, when you start moving it around it will go quicker than you think. Eventually you will need to replace your cars… Your fear that the school C1 and maybe C2 attends will suddenly become unaffordable is probably not going to happen. Yes, they will expect more from you, but if they were generous when you had nothing, they will probably still be more generous than non-meets aid schools, when you have something. However, when C2 is looking at schools, remind him/her that bottom line family cost still matters and don’t let C2 fall in love with a school that gaps hugely. Even though you now theoretically could afford $240K to send them, given your incomes and assets it would be a horrible decision. The goal is not to make the inheritance “disapear”, but to use it wisely for your family. Take your time, do your research and good luck!</p>

13

<p>Re buying a house: Wouldn’t you first have to receive the money? And wouldn’t that show up somewhere on FA forms?</p>

14

<p>^ The idea is to control the timing so they get the inheritance after filing in 2013 and before filing in 2014. If they buy the house in-between, then it won’t count as an asset on FAFSA, and there is a good chance it won’t be counted or will be capped on Profile because of the OP’s relatively low income.</p>

15

<p>LasMa , I could be mistaken but I do not believe inheritance money is considered income. There might be a dollar threshold to this…but I think that is for inheritance tax purposes.</p>

16

<p>thumper1: LasMa probably means the money would ‘show up’ on financial aid forms as an asset in a bank or investment account (versus an inheritance appearing as income).</p>

17

<p>Receiving the money will only show up on the FAFSA IF the money is still in the hands of the family on the day they file the FAFSA.</p>

18

<p>Have you run the school’s net price calculator with and without the inheritance? You might be surprised at the amount of assets the school would expect you to pay, even without sheltering tricks.</p>