Inheritance and Financial Aid

Paying for College
61

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<p>Oh I absolutely DO understand how colleges provide aid. If someone has $100,000 in assets, they have $100,000 in assets...period. Here is what it sounds like you want to say to the college: "My child has inherited $100,000 that she cannot touch until she is 25 years old. I (parent) do not want you to consider this $100,000 in assets because it will affect our EFC...and really it's money we can't touch now. We do not want to take out a loan in our name or cosign with our daughter. Please do not consider this $100,000 in the bank...really we just want our child to HAVE it when she graduates...not have to pay back loans." If that is your thinking, I would say, try it with the college finaid officers. Perhaps it will be taken into consideration.</p>

62

<p>OK, I'm going to try to throw out another "creative" suggestion as to how to manage the situation of the $100K.</p>

<p>I am assuming here for the sake of argument that the student in question here will be attending school away from home (as the costs described so far seem to be in line with that situation).</p>

<p>Would it be possible to have the trust use the money to purchase (or put a good sized down payment on) a property near the campus where the student intends to enroll? The trust could rent the property (at a rate close enough to market not to make an auditor blush) to the student, allowing the student to take on boarders to offset his rent and possibly save some of the cost of education? And even perhaps give a small discount for the effort of managing the property (painting, small repairs, supervising larger issues)?</p>

<p>The trust has a reasonable investment (that could be turned over to the student at 25) that the student could use to help indirectly in offsetting the cost of education while actually giving the student $0 in keeping with the requirements of the trust.</p>

<p>Yes, this doesn't adress the issue of FA eligibility, but I think the OP is concerned about being able to get through (cash flow wise) the 4 years of college ahead. </p>

<p>Just trying to suggest solutions...</p>

63

<p>The property would still be in the students name wouldn't it? Students don't get protection for real estate like parents do I don't think.</p>

<p>Oh I just reread the post and you do say it does not affect finaid eligibility. Interesting concept. I had said to my husband that I wished we had the cash to spare & I would buy an apt near Ds school - with 4 years of UG then 4 (hopefuly) veterinary school it would save a lot of board and lodging!</p>

64

<p>When I was in grad school, a parent purchased house near the school, and rented it out for a very reasonable amount of rent to several students. That parent practically begged me to move in, but I did care for his D (just did not have a great first impression and I went with my gut and did not move in). Anyway, I am sure that this must have paid both to let D live rent free, and perhaps have that property grow in value while D was living there. I don't know how goaliedad's idea would save a dime in COA, but it might offset some losses if this were allowed through the trust (possibly living rent free, and allowing property to hopefully appreciate).</p>

65

<p>"and two, it is puzzling that, knowing you had a child approaching college, you'd put your money into a second home, rather than college savings."</p>

<p>some mistakenly assume that ALL mortgage payments would reduce their EFC</p>

66

<p>To clear up some things to my understanding of THIS situation (YMMV)...</p>

<p>The $100K is in a trust that cannot disburse money to the beneficiary directly to the student during the time in school.</p>

<p>The $100K will be "taxed" (considered as a student asset in calculating the EFC) no matter what the parent does.</p>

<p>The student will need a place to live that will probably cost ~$5000 for room/utilities. (Food is a separate requirement)</p>

<p>The student could possibly collect enough boarder rent to pay the "rent" charged by the trust and utilities and could possibly live in the place rent free. This is where $5000 is cut from the COA.</p>

<p>The "rent" charged by the trust should be enough to cover the mortgage, insurance, maintenance, etc. but not much more, so the trust should not have a cash flow problem, nor show considerable income.</p>

<p>The trust should be able to depreciate the asset on its books (I am not a CPA, so don't consider any of this tax advice.), reducing the total accounting worth of the trust in its books (although the actual market price may actually rise). This is definitely something to consult a CPA about!</p>

<p>Even if the value of the real estate in the trust must be re-appraised annually, the future tax liability of any depreciated value can still be subtracted from the value of the estate (and thus the student's future net worth).</p>

<p>In any event, the $5000 in room cost not charged to the student is a cut in the COA. The university does not consider from whom the student rents (nor specifically how much that student is charged) when calculating COA for determining FA awards.</p>

<p>It is NOT a second home for the parents, so it doesnt' affect the PARENT's part of the EFC. The student's part still has the trust asset, but at least the trust is doing something constructive for the student as opposed to only adding to the STUDENT's portion of the EFC.</p>

<p>I hope this adds some clarity to my thinking.</p>

67

<p>Just want to add, that Thumper is one of the premier financial aid experts among parents on this board. She's been helping answer questions for parents and students for years, and certainly does know how FA works.</p>

68

<p>Goaliedad, I don't think there is a house. There WAS a house, but because of various debts, the house had to be sold. See post #24. So now the daughter is left with approx. $100K from the proceeds of sale, which is in a trust fund that the daughter cannot touch until age 25, and apparently there are no disbursements from the trust. So there is $100K of untouchable, unreachable money belonging to the daughter. Because it is in the daughter's name, it adds $20K to the EFC. Because the daughter has no other money, that means that the father will have to come up with an additional $20K the first year for college. </p>

<p>If the money were in a UGMA account, then $20K could be spent on college expenses, and the following year, the EFC hit would be 20% of $80 -($16K) -- the 3rd year it would be 20% of $64K ($12.8K), and the final year it would be 20% of $51.2K ($10.2K). So after 4 years of college, assuming that the kid's share of EFC is paid directly from assets, the kid is left with $41K. (This doesn't account for interest earned on the money, so actually the kid might have more -- but for purposes of illustration I will leave interest out of the equation). Net impact on EFC=+$59K over 4 years. </p>

<p>However, since the money is not being disbursed, there is $100K that is going to add $20K to the EFC each year - so +$80K over 4 years. So if the father had some other asset he could liquidate and make the $20K annual payments from, and then merely asked daughter to pay him back at age 25 -- instead of having $41K left her her trust she would only have $20K. So right there, the tying up of funds costs her $21K in extra expense for college. </p>

<p>But let's assume, as is likely, that the dad doesn't have a spare $80K lying around. D. can't borrow it, because she's a kid -- lets say she is eligible for a subsidized Stafford loan, and over 4 years she can borrow $19K with deferred interest; the other $61K is a higher interest, nonsubsidized loan with interest accruing from the beginning. Someone has to make those payment -- it can't be the d., so it is probably going to be the father. Let's assume he makes interest-only payments -- I'm not going to go through the math to figure out what that totals -- suffice it to say that in year #1 there will be about $16.5K of debt -- at 8% that would be around $1300 of interest -- and by year #4 the total interest on $61K is $4.9K annually - so very roughly it probably is $12K in extra interest payments over the 4 years. </p>

<p>So now, because of the money held in trust that neither the father nor daughter can touch, college has cost +33K more than it would if the money were available. Let's say dad agrees with daughter that she will reimburse him when she comes into the money at age 25: she probably ends up with about $8000 left over. </p>

<p>Of course, the dad can decide to take on some of the expense himself, without getting repaid by the daughter -- but the point is that no matter how you look at it, the tying up of the money puts this family in much worse financial straits than if the kid had access to the cash. </p>

<p>I realize that this kid is still better off than, say, my kid -- who comes out of college with $19K in debt and -0- trust fund -- but I can see the reason for parental frustration.</p>

69

<p>
[quote]
Goaliedad, I don't think there is a house. There WAS a house, but because of various debts, the house had to be sold. See post #24. So now the daughter is left with approx. $100K from the proceeds of sale, which is in a trust fund that the daughter cannot touch until age 25, and apparently there are no disbursements from the trust. So there is $100K of untouchable, unreachable money belonging to the daughter. Because it is in the daughter's name, it adds $20K to the EFC. Because the daughter has no other money, that means that the father will have to come up with an additional $20K the first year for college.

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<p>Yes, I understand there is a house to be liquidated in the estate that is funding this trust. And the proceeds from the sale of that house is approximately $100K, NONE of which can be distributed to the student beneficiary of the trust.</p>

<p>My thinking is to take the proceeds from the sale of the house in the estate and put a down payment on the purchase (as an investment of the trust) of a rentable real estate unit (condo, small house - depending upon particular market) near the campus the student intends to enroll in, providing a "free" place to live in return for collecting the "rent" from other tenants, managing the place, etc.</p>

<p>As long as the trust does not specify how the assets in the trust must be managed, real estate is a well established investment for trusts to use to provide returns to its beneficiaries. In this case, there is no cash going to the beneficiary (in keeping with the directives of the trust), but it can provide value to the student indirectly thorough the students involvement with the asset (rental property).</p>

<p>From a whole life situation, it actually is a good idea in that the student, knowing that the rental property will be his/her (I cannot remember the gender of the OP's child) asset at age 25, so it behooves him/her to take good care of the property (keeping its value up) and collect rent promptly (so it doesn't get foreclosed upon).</p>

<p>And of course, this will take the cooperation of an understanding trustee, who will have to OK this whole idea.</p>

70

<p>There is frustration with this situation...but I still contend (as in the above post) that this kid is better off than those who will come out in debt AND do not have a $100,000 nest egg to help them. There are plenty of choices that can be made. This student could go to a school where she is in the higher level of applicants and might get significant merit aid. She could go to a CC for two years and transfer to a more expensive school for her last two years. She could go to her own instate university. She could commute, if necessary. What would the OP's family have done IF this windfall had not come their way? I hope they would have thought of options for college that would have been financially doable. And YES, I do realize that this is an asset that will be considered when computing the EFC for this student. But I seriously take issue with the fact that this OP is implying that this inheritance should not be considered in calculating the student's EFC. That's not the way it works...nor should it. That money is an asset. Period.</p>

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<p>The $100K of trust money is not just sitting around. The trustee must maximize the capital and income of the trust funds, at a reasonable risk. It's being invested, so at the end of 4 years, there is more than $100K in the account. That leads to two results, per calmom's post. One - d's EFC each year is actually higher due to the increased balance in the trust based on the income or growth of investments, but two - d has more money at age 25 to pay off loans.</p>

<p>I think goaliedad's idea is worth exploring, but remember as well that the the rent from others (not the beneficiary if the trustee agrees) goes back into the trust, increasing the trust balance and going against the EFC. Also, who will actually "manage" the property? If the trust has to hire someone so that its income and expenses are essentially a wash, the trustee would be violating his/her fiduciary duty to increase trust assets. </p>

<p>This is a very complex situation and depends both on the precise wording of the trust (even trusts that say no distributions until 25 can vary wildly on their wording and thus, permissible or forbidden acts) and on the trustee. In fact, the OP needs to check whether the trust will allow income to be distributed to the beneficiary, and merely requires the principal to remain in the trust, or whether both income and principal must remain in the trust. That makes a huge practical difference in the EFC. (Remember, a non-minor child can also make a gift to her parent, so d could gift any income she received to her parents, therefore removing it from her EFC to theirs in subsequent years.)</p>

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<p>Re the second home--for one, once sold, you wouldn't be paying a second mortgage, so those payments could go to school,</p>

<p>and two, it is puzzling that, knowing you had a child approaching college, you'd put your money into a second home, rather than college savings. A free choice, but one that leads to consequences.</p>

<p>GARLAND: We didn't know the grandmother had a trust fund set up nor that she was going to die. It's not like we're not contributing to her future education. We are. But I don't want the schools to eat up all her cash. Nor do I want our EFC to be unusually high because of this unanticipated windfall</p>

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<p>I'm not thrilled with the colleges eating up my money either. I would much prefer to give my son $100,000 that I have paid in tuition over the years to him upon his graduation. BUT I had that money as assets, and his finaid was adjusted accordingly. I still say...what a wonderful gift your daughter has received. Yes, it will adjust her EFC higher, but in the end, at least she will have the money to pay for any loans you secure with her. I can't think of a better gift than that from her grandmother. If you really don't want to spend that inheritance that way, consider alternate and less expensive college choices (as posted above). Then there will be money there in the end.</p>

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<p>Patch--but whether or not you knew about the trust, you apparently fall into a financial level where, without the trust, you were going to need help paying for college. And that be the case, why would you tie up income and assets into a second home?</p>

<p>And Calmom, your assumption that the trust will add 20k to the EFC assumes an EFC that was otherwise 20K or more less than Cost of Attendance? Do we know that? If, absent trust, the EFC was something like 30 or 40K anyway (possible for a family which can pay two mortgages) than the trust really isn't adding 20k to the EFC.</p>

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<p>Patch...this is all very simple, really. Just write the finaid offices a letter. Tell them that your daughter has inherited $100,000 in a trust that she cannot touch until she is 25 years old. Tell them that you do not want this $100,000 to be used in calculating your EFC for your daughter because you don't want the colleges to eat up her money. Tell them that you don't feel that you should have to take out loans to fund your daughter's education either. See what they say and let us know. We are just folks on a message board....most of us do not calculate finaid for colleges. Maybe the college of your daughter's choice will agree with you. I'm dying to hear.</p>

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<p>
[quote]
And Calmom, your assumption that the trust will add 20k to the EFC assumes an EFC that was otherwise 20K or more less than Cost of Attendance? Do we know that?

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No, but since Patch's said in the first post that he is "terrified" about the impact on financial aid, I'm assuming that a significant amount of aid is needed. </p>

<p>The point of my post was to illustrate the impact that the "untouchable" nature of the trust has on overall finances. It seems that people are very unsympathetic to the fact that a financial situation that is outside of Patch's control is having an adverse impact on the finances, far worse than would be the situation if the grandmother had set up a trust and specified that it could be used for educational purposes, in which case the trustee could disburse funds as needed each year and the daughter could go to any college she wished. The stated reason the trust is untouchable is because grandma wanted her to have that money after college -- and the reality is that if daughter agrees to pay Patch back for her portion of the EFC, then the fund will end up substantially being less than it would be if it were available -- it is counterproductive for the money to be tied up this way. </p>

<p>I suspect that the family situation makes things even worse than that -- grandma's side of the family probably would be quite opposed to Patch demanding repayment from daughter and thus "raiding" grandma's precious trust when d. reaches age 25, so when d. gets into dream school and can't afford it because of the $20K hit on the EFC, Patch is made out to look like the bad guy for not coming up with the money.</p>

<p>I think the solution is that Patch needs to clearly explain, now, to the daughter what Patch can afford to pay -- and how that trust might impact financial aid; and then after daughter gets admitted to colleges, Patch will have to work with the financial aid offices of the top choice colleges to see whether any adjustments can be made. If d. has her heart set on a college where the financial aid is insufficient due to the trust corpus, she is going to need to go to court (with Patch's help) to try to get a court order revising the terms of the trust. Perhaps with a showing of the impact on financial aid, like the one that I set out (but properly accounting for interest & trust income) -- a judge will be convinced that the grandma's intent is better served by allowing appropriate disbursements. You can challenge these things in court -- but unfortunately I don't think such a challenge would be successful when things are only hypothetical -- Patch is going to have to wait until the college has been settled on and the financial aid situation is clear.</p>

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<p>Thumper, I think you are right that Patch should write to the colleges and explain the situation, but I don't think he should say they don't wan the colleges to "eat up her money." Obviously, colleges expect people with assets to pay their fair share. </p>

<p>However, Patch should explain that the money cannot be accessed now for any purposes, and attach trust documentation which makes that clear. It is possible that, given the circumstances, a college may attach a lesser value to the trust than the full dollar value: money that you can't get until later is a "future interest" that is not worth as much as a present interest. A lot can happen between now and the time the daughter turns 25. </p>

<p>Alternatively, Patch may simply provide a figure based on computation of the "present value" of the money using tools like the calculators on this site:
<a href="http://www.uic.edu/classes/actg/actg500/pfvatutor.htm%5B/url%5D"&gt;http://www.uic.edu/classes/actg/actg500/pfvatutor.htm&lt;/a&gt;&lt;/p>

<p>For example, if I enter in $100,000 and 8 years (assuming d. is age 17 at the time of calculation) - and enter in 6% interest, I find that the present value of the money is $63K. (But I'm not sure I'm entering stuff on the online calculator correctly -- so I think Patch would want to run the calculations by a CPA to make sure he gets it right). It's complicated, because the money in trust is also earning interest, so it will be more than $100K in 8 years -- but the reality is still that it is not available to be USED now so it is not worth its full face value. </p>

<p>It is quite possible that colleges have experience dealing with this sort of issue -- certainly Patch's daughter is not the first kid to come along with a trust that cannot be accessed until some future date -- and perhaps Patch will get better answers down the line simply talking to the college financial aid offices and ascertaining their policies as to how to treat such funds.</p>

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<p>This is really interesting. I wonder why the grandmother did not want the money available to pay for college. And I wonder why this money has this "don't spend me for college" aura around it, even when Patch discusses it.</p>

<p>If the D was going to get the house at age 35, but the house had to be sold to pay the debts, then why does D get the cash at 25 and not at 35 (same age as house)? Who exactly set up this trust? It sounds as though the grandma willed the house to the D, not 100K at age 25. </p>

<p>I can see the frustrating part here, but let's say the money was available when the daughter was 18. What does this change? It's still an asset (albeit available now) and will still be factored in when calculating financial aid eligibility.</p>

<p>It almost sounds like that short story, The Pearl.</p>

<p>I think a lot of really creative solutions have been suggested; mine is to attend an instate public college paid for by Patch (assuming this is affordable without aid); then when daughter is 25, her windfall will be intact. </p>

<p>In other words: give daughter an education you can afford; if she wants something else, then her windfall will be decreased.</p>

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<p>to Goaliedad: that is a very creative suggestion you posted about acquiring and leasing back a property from the trust. I will have to investigate that. Thank you for that helpful suggestion!</p>

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<p>To Simba regarding Post 65:</p>

<p>As for parental assets...I am not concerned about the equity in my second home. It has almost none! </p>

<p>I think you misunderstand my concern. I am trying to find a way to preserve her trust, not say I cannot contribute to her education. I am also trying to find a way to keep my EFC to what it would have been prior to my daughter inheriting this trust.</p>