My D may be the getting some money related to the settlement of a lawsuit. She is is over 18, so it will likely be paid out directly to her.
Any advice on how to deal with this in a way that minimizes the impact on subsequent financing aid?
You need to determine if a) the settlement funds will be treated as income for your daughter for financial aid purposes and b) where the money once received will be invested. It might make sense four your daughter to put the money in a 529 account, which will be considered a parent asset by FAFSA even though she will own the account. Profile schools vary on whether or not a student-owned 529 account is considered a parent asset. But I think the biggest question as far as financial aid impact is the income question. That question gets either a yes or no answer.
Actually we were recently faced with a similar situation. I am not sure if this was the best thing to do in terms of financial aid issues, but we opened an investment account in the parents name with my son as a beneficiary. He is over 18 and it is understood that the money will be used on his behalf. I hope this was the right decision.
If your son was the recipient of the lawsuit award and he was of legal age when the funds were distributed, my concern would be that money which was legally his was retitled as someone else’s asset.
If the son is over the age of 18, and the money is invested in the parent’s name, wouldn’t he have to pay gift taxes on any amount over $26,000? He can legally give each parent $13,000.
To the OP: instead of trying to protect the money and worry about impact on financial aid, I’d be rejoicing that there was money available to pay for her education. It would only impact next year’s financial aid, as it was received this year and reportable on the 2016-2017 FAFSA/Profile.
Short Answer: Ask your lawyer about a structured settlement.
Settlement payouts are not taxable so it will not show up on FAFSA or CSS as income in the year that it is paid. The caveat is that once it is in an account it will be a reportable asset. If you are You should look into placing the money in a trust that is protected. There are several variables. If her school only uses FAFSA then it is easier. If you place it in an account that is not gaining a lot of interest, it won’t impact the calculation much. CSS is a little more sensitive in rooting out assets. If you don’t necessarily need the money to pay for school, you may be well served to structure the settlement. Ask your lawyer about this option. The defense insurance companies are usually happy to do this. They usually have companies that they work with to set up the structured payout over time. You could It might be nice to have the funds paid out when she graduates and needs money to establish her own independence. Or if you need the money to pay for school, you could have annual payouts in an amount that you need for tuition. It isn’t taxable income and isn’t in a bank account that they will see in the financial aid forms.
Simply because a payment received by a student is not subject to income tax does not mean that it is not reportable on FAFSA or Profile. Both forms have questions relating to student untaxed income and benefits.
Regarding post #5. If a Profile school wouldn’t it be reportable as being in a trust?
A trust with the student as a beneficiary needs to be reported on both FAFSA and Profile.
Explain to me why if your kid now has money for tuition, that it should not be spent on tuition.
Kk mama - first, it is $14k and not $13k and no, he would not owe gift taxes unless he has already gifted $5.43 million.
We had a similar situation before my college sophomore’s senior year. Depending on the settlement, it may or may not be taxed. If taxed, it shows up in FAFSA under income, if not, it shows up under assets. Difference for us was it was a settlement for my wife and not son. Then we did letters to every school explaing unusual circumstances since it was a one time bump in both income and assets. The schools recalculated aid excluding the settlement
GMTplus7 - we are planning to use it entirely for college. I was just interested in trying to see if there were options to maintain other aid, since the settlement will not be enough to pay for it all.
If it was a court-ordered settlement set aside for future medical needs, that can be excluded.
A structured settlement could be helpful.
Fundamentally, whether a student inherits money, receives bar mitzvah money gifts, gets a lawsuit settlement, or wins a modest lottery prize, it is likely to be considered as an asset for financial aid purposes whether or not it is considered income for financial aid purposes. I can see colleges not including it as income if it is one time, but I don’t see most excluding it as an asset.