Question related to how Trusts may impact collage financial aid.
I have a high school Junior. He will likely qualify for significant collage financial aid because of my current income level. My father is considering establishing an irrevocable trust and naming all of his children including me as beneficiaries and distributions to begin after he and my mom pass.
Can anyone tell me if this trust is likely to have an effect on my sons financial aid awards for either CSS Profile or FAFSA?
I cannot answer this with 100% certainty, but I do not think that this will make a difference. There is no assurance that this money will be available when needed - i.e, when your child is in college, nor is there a guarantee of the amount. Should your parents live long lives or have high medical costs, for example, the distributable assets will be much less. Most important, it is not your money now!
One question you may want to answer on your own is whether a bank would make a loan using this as collateral. If not, I think you have a pretty good answer/argument that this is not a reliable source of income. If they will, regardless of impact on FA, you may have a buffer for college costs. Without knowing what assets are in this trust or the amount, it’s hard to answer for sure.
Not sure you are correct.
Our family was offered to be beneficiaries in an irrevocable trust that was real estate. We would have had NO ability to access this asset value, and it could not be held.
We were told that we needed to list OUR share value in this trust as an asset.
We declined to be in it.
I’m not a financial expert, but payments only begin after death. If it’s set up like ours, both have to pass before any distributions. That could be a long time. (Let’s hope.)
Yes, @thumper1 , that could be the case for real estate, which is where the bank question feeds in. But I agree that even then it could be complicated because it is virtually impossible to borrow against one’s interest in a trust; typically the trust has to be the borrower. So it is non-monetizable wealth.
I was thinking about this more in terms of “remaining financial assets” at time of death. Recently went through this with a parent who spent down far more than expected as a result of care needed during a long illness who was quite disappointed not to have left more.
I am most certainly not an expert on FA, so defer to others.
https://thechoice.blogs.nytimes.com/2011/11/15/kantrowitz-2/comment-page-1/?_r=0 One of the questions and answers in this blog post discusses trusts.
The answer to the blog question found in the link above (post #5) is spot on. Typically, unless there is an involuntary restriction on the Trust placed by a court, the beneficiary’s share of the Trust must be reported as an asset on financial aid documents. It doesn’t matter that it may be decades before the beneficiary has access to the funds in the Trust. It is important that anyone who is considering establishing a Trust be aware of financial aid ramifications for beneficiaries and their dependents.
My H’s father gave him the family home when H was 19. His parents had life tenancy in the house so H had no access to funds generated from the house until after his parents died. His mom was still alive when our D’s went to college and we reported the house as an asset.
One of my kids was the beneficiary of a testementary trust (person who created the trust had already died when my kid applied to college). There was a restriction on the trust that the kid did not have access to the money until age 25. It wasn’t a large amount (~25K).
When we worked with her colleges to explain that restriction, one of the three we talked to adjusted her FA (did not take the trust into account as an asset). The other two wouldn’t make any adjustment. So it really varies by college.
My thought is that if the trust is established as a part of his will, then you don’t have to report it until he dies. The trust doesn’t actually come into existence until then (at least my relative’s didnt). They could set it up so it goes to the other spouse if they survive, or into a trust if the other spouse is deceased. Any lawyers out here can correct me, but I think it is called a pourover trust. Your assets “pour over” into it when you die.
If it happens that both of your parents die while your son is in school, the trust would be established and funded, he may need to report it then and his FA would take a hit. But he may get through college before that happens, too.
Of course, your dad’s attorney needs to weigh.
A testamentary trust is a trust that is established in a will and only comes into effect when the grantor dies. It is not the type of irrevocable trust that OP is describing. An irrevocable trust is established during the life of the grantor and cannot be modified or terminated by the grantor. A will can always be changed or nullified before someone dies, so the provisions of a testamentary trust can always be changed before it comes into effect. There are all sorts of tax and inheritance issues involved in deciding what kind of trust to create, when to do it, and how to fund it. It can be very complicated, and is rarely simple.
I agree it can be trouble. For some reason, I once read all the CSS info related to this and a trust, even restricted/unusable, was still an asset to be reported. You’d need to confirm, but I’m guessing it’s still the same intent.
The thing about a college ignoring this would fall under Professional Judgment. No guarantees they would.
Ours was an irrevocable trust. My husband and any of our kids over age 18 would have been beneficiaries. We begged the inlaws to at least change that age to 25. Nope, they would not. DH asked not to be part of the trust. It caused some ill will at the time.
And we were told our share WAS an asset for finaid purposes. Not really an issue for us…but future generations would have been locked into this too.
If this is real estate, I would suggest the book "Saving the Family Cottage " which gives alternatives to a trust.
Even 25 would have been an issue. Or much older. And a testamentary could pose issues, too, if they passed while your child is in college.
This is one of the bad catches in how assets are viewed.
One thought on an irrevocable trust, it could be created, but not funded, for example if the future funding was a life insurance policy, then the death benefit would fund the trust and there would be little value to claim, just the cash surrender value of the policy.