Life insurance money

Hi,

My son is a senior and turned 18 last week and a life insurance benefit that has been held as a settlement certificate was disbursed to him. The proceeds were held in an account at the insurance company in his name for 5 years, until he reached age of majority, and were deposited directly into his checking account. There is some money owed to family members that helped us when his father first passed away (his second round of braces that I could not pay for and some big school trips, too) that will be paid back this week. He will deposit some into our joint savings account for first year expenses not allowed with 529s. A financial planner has advised that that he deposit the balance into a 529 account owned by me with him as beneficiary.

I’m hoping a financial aid officer here can tell me if all this money movement right before we file FAFSA and CSS Profile will hurt chances for aid or look bad. The timing couldn’t be helped because of his birthday. I thought I researched this well in advance, but now that the money is accessible I’m afraid of giving him bad advice. The amount is substantial for an 18 year old but not nearly enough to pay for 4 years without aid.

Thanks for any advice you can give. I’m panicking a bit.

Any amount you have in an account on the day you file the FAFSA will be an asset. if you pay family members, it will not be in his account. If it is in a 529 account, it will be assessed at 5.6% as a parental asset, but if it is in his account it will count as a student asset and assessed at 20%.

If you qualify for simplified assets, then it won’t matter, but otherwise it will count against you for financial aid purposes. It is an asset you have available to pay for college tuition. You don’t have to file the FAFSA on October 1. If you need some time to pay those bills or move the money around, take that time.

Hi, thanks for your answer. We’ve had this plan for the money for months but I started poking around on old threads here and it made me question whether it’s the right way to go. Specifically, I read that colleges can ask for past bank statements and if they do, it will show a large deposit in my son’s account and then large debits right before filing the aid forms.

Also, the financial planner said I should be the owner on the 529 - from what I’ve read here today, not everyone agrees about whether that’s okay to do. I also read that if the interest on your tax return doesn’t match your assets that’s a red flag. My son payed taxes on the interest in 2014 and 2015, but now the asset will be in the 529 and considered a parent asset. Is that an issue? I just want to be extra-careful so we don’t do anything considered unethical. I also don’t want a large amount of money sitting in an 18 year old’s checking or savings account. I would have wanted to take my friends to Europe for a month, lol.

One more question about the 529: Should he open his own? The financial planner said no, it’s better if I own it and he funds it. I didn’t think much of it, until today.

It is not unethical to do financial planning, including college planning, and that’s what you are doing. I haven’t been asked for bank statements for my fafsa verifications.

I’m not an expert on 529 accounts, but I don’t think it matters if it is your account or your child’s, it is assessed at 5.6%. If it is in his bank account, different story. Make sure he only funds it with money he wants to use for his education. If he needs money for other things (a car, senior year high school costs) he should keep those amounts out of the 529.

I think the CSS profile treats the 529 a bit differently than FAFSA, I think @BelknapPoint might know more about that.

I am curious what first year expenses you mentioned that cannot be paid with 529 funds.

If the parent income is under $50,000 (2015 income is used on the 2017/18 FAFSA) and other conditions are met like eligibility to file 1040EZ or 1040A, or parent is dislocated worker, or family qualified for federal means tested benefit (like free/reduced lunch) in the last two years, then simplified needs test applies for FAFSA, whereby assets don’t come into play.

I’m curious about CSS & 529s. My son is applying mostly to private schools. He’ll also apply to the state flagship, a state regional school and Alabama.

As far as first year expenses not covered - I was thinking about travel to and from school, dorm room supplies, spending money, though I imagine he’ll work part-time. This money is for my peace of mind, I’m not in a financial position to deal with unexpected expenses. I thought it would be a bad idea to have everything in a 529 - would love some advice if I’m wrong.

My income is under $50,000 and we qualified for free lunch in the 2014-15 school year. Not after that, thank goodness, as a raise and SS Survivor benefits put us over the income limit. I didn’t work outside the house from when my son was born until 2012 and then could only find a part-time job. My hours have increased but I’m still part-time (32 hours - my employer does not employ full-time workers because… no benefits) and have blown through much of my life insurance benefit just staying afloat. I haven’t been able to find better employment. Does that make me a displaced homemaker? I would think the clock has run out on that.

There really is no definition of displaced worker. YOU have to decide if you are displaced. It might be that someone was laid off and returned to a much lower paid job, or that you want to work full time but can’t find a job. Working, but not working at full pay.

It’s actually unfortunate that you don’t qualify for free or reduced lunch, at least as far as financial aid goes. That’s one of the things that would qualify you for the simplified needs test. Can you file a 1041A? (Not DO you, but CAN you). If you don’t own a home you may be able to. If so, then the assets won’t matter on the FAFSA. The private schools/CSS are different.

You (the parent) also have a small asset protection allowance on FAFSA, probably about $10,000 (it is based on your age), so some of the 529 or your bank account would not be assessed at the 5.6% rate. Your son doesn’t have that protection, so again, if it is in his account, it will increase his EFC. Your first year cushion might fit under that allowance, but it has to be in your name.

Some of the ‘meets full needs’ schools may only look at income. Stanford promises to meet full needs for any student in a family with an income under $125k. I’ve never read they look at assets. I’m not sure about HYP, Amherst, and if they are looking at assets for low income families.

If that’s the case, and your son’s stats make him likely to get in those schools, you may not want to put the money into a 529 (unless grad school is also in the plan). You don’t want to put $100k into a 529 and then never need to use it because you could (could) end up paying a penalty (although I think you can withdraw the amount per year that a scholarship/aid paid). You need to ask the tax people about that.

From the 2017/18 EFC formula:

OP said they qualified for free/reduced lunch in school year 2014/15 wouldn’t that count for “having received federal means tested benefit during 2015”?

Sorry forgot the rest of the quote

I would be extremely careful about putting your son’s money into a 529 of which you are the owner. That’s turning his money into your money; essentially he would be gifting you the money. Instead, consider opening a 529 account where your son is both the owner and the beneficiary. This will be treated as a parent asset on FAFSA and therefore receive more favorable treatment than if your son keeps the money in a bank account or invests it in non-529 assets in his name, like stocks or mutual funds (which you likely aren’t, and shouldn’t be, considering given the short time horizon in which the money will be used).

How a student-owned 529 account is looked at by Profile schools depends on the school. Some will consider it as a parent asset (more favorable treatment) like FAFSA, and some will peg it as a student asset (less favorable treatment). If this will be a financial deal breaker for you, the best thing to do is call the FA office of any Profile school that he wants to apply to and ask them how they treat student-owned 529 accounts; they should be willing to give you a straight answer. If they won’t tell you or the answer is that it counts as an asset against the student, he can cross that school off his list (again, if it’s a financial deal breaker).

Don’t worry about making big financial moves right before the FA forms are filed. This is not out of the ordinary and probably expected to some extent. If any school gets curious (not likely, and how will they know anyway?), you have perfectly good reasons for doing it.

So: no need to panic, but I want to emphasize again that putting his money into a 529 account that you own is unnecessary at best and could be looked at as hiding student assets at worst (for Profile schools that consider a student-owned 529 account to be a student asset).

  • 1 on the above. A person can contribute money to a 529 for relatives but not for oneself. You don't say how much money he inherited from the insurance but a 529 plan is best for long term planning. There is essentially no tax benefit for parking money there and then spending it within 4 years.

@foxford I think you might qualify as a displaced homemaker. Look at the last item on the list. https://fafsa.ed.gov/fotw1516/help/fotw91h.htm

Yes, looks like OP might qualify for simplified needs test either through displaced homemaker, free/reduced lunch in 2015 or maybe she filed a 1040 A in 2015. But that would only mean that assets won’t be considered for FAFSA EFC calculation.

CSS profile schools will have their own calculations and formulas.

Also if the income would increase in future years, assets might come into play then for FAFSA as well.

The only thing you can do is make the best plan possible so to have the least impact.

If OP’s son is planning to use the majority of the insurance proceeds for his college expenses then he can put that into a 529 in his name. He can keep some money out for immediate expenses, a computer, a car.
He can also plan to spend up to $4000 towards tuition, fees or books with non 529 money so that mom can claim AOTC.

It’s good that the money is there to help with school.

My D worked this summer. She wants to save up money for the future (to get an apt, car). Her savings will increase our EFC by several hundred dollars but it is what it is. She is still further off with money saved. But we are not in Pell grant range for our EFC and she has a merit scholarship that covers most of her costs. The most impact our EFC has is on the state grant and amount of subsidized loan.

You can target schools that use only FAFSA, merit schools. Run some net price calculators on college websites to see how much impact his savings and 529 would have.

This is not accurate. Anyone who is eligible to be a 529 beneficiary can open and contribute money to a 529 account which they own and of which they are the beneficiary.

This is also not accurate. As far as tax benefits go, it all depends on how the investment performs until the earnings are distributed for qualified education expenses. Granted, if the money is needed on a short-term basis, it will likely be invested in a less risky way. But it’s certainly possible to accumulate significant earnings, even in four years, and all of that would be taken tax free from a 529 if used for qualified education expenses.

And putting the tax benefit aside for a moment, there is a major reason that OP’s son should consider placing the insurance money in a 529 account. For FAFSA, and for Profile schools that consider student-owned 529 accounts to be parent assets, there’s potentially a huge benefit to putting the insurance money in a student-owned 529 account: it gets the asset out of the student’s name and puts it in the parent’s name, where it receives much more favorable treatment under the need-based financial aid analysis.

Thanks for all the replies. For context, it’s $95,000.

@BelknapPoint Thank you for that info, it confirms my discomfort with the original plan and how it would appear to colleges. It seems that financial planners don’t have much insight into financial aid - just because it’s legal doesn’t mean colleges won’t see it as unethical. He will open his own account. I’ll call colleges this week to ask how they handle student-owned 529s and hope it doesn’t change his list at this late hour, but I’m sure it will. He’s done so much work crafting a list and on apps, I don’t want to discourage him. Does anyone know of a list of privates and how they view student-owned 529s?

@WISdad23 We spoke to a planner at length and found the best place to put the money is the 529 for aid purposes. If he purchased stocks or mutual funds or kept it in savings, he wouldn’t have the benefit (at some schools) of it being considered a parent asset for financial aid. It’s not ideal, but there aren’t any better options right now. That I’m aware of, anyway.

@brantly @mommdc It sounds like I qualify for displaced homemaker, but it seems so subjective. The reduced price lunch sounds like the better option, because there is definitive proof from the school that we had fee waivers in Spring 2015.

He saved 3000 from his summer job for application fees and possible weekend college visits, and that is in his account right now.

A few things I’m wondering now:

He asked about buying a used car and paying the insurance up-front but I discouraged that. I thought he should wait to see what type of aid packages he gets and decide if a car is possible. I also thought it would look bad to buy a car right before filling out FAFSA and CSS. Am I wrong? Should I let him buy a car? It would certainly help me since I spend hours in the car each day after work getting him where he needs to go and taking care of all the household errands. I never have a large block of free time, it seems I always have 45 minutes before I’m on my way somewhere else. It’s exhausting now but I’ll probably miss it next year.

Can he give me money that I keep in my own account to dole out for fees, school-trip money, AP exam fees and maybe prom? Or is that a no-no? It’s a separate account I had used for SS Survivor’s benefits so I could keep it all straight. We planned on that but now I’m unsure.

With this new information, I’m concerned about his college list now. Can anyone have a look? My head is jumbled at this point. He has 34 ACT, 5.12 WGPA, 3.7 UWGPA.

Public:

UIUC
UIC (if he needs to live at home because of $)

Alabama (he qualifies for out-of-state scholarship)

Privates:

Loyola Chicago
Lawrence
Kenyon
Grinnell
Tulane
U Chicago
Wash U St. Louis
Pomona
Vassar
Wesleyan
Brown

He’s not excited about big state schools. I’m worried that he’s reach-heavy, and the money questions are an added twist.

It won’t look bad to buy a car or make any kind of major purchase immediately before submitting the FA forms. How will the schools know, anyway? If your son gives you money to keep in your account, it should still be reported as his asset when completing the FA forms, unless he is making an unrestricted gift to you, which it doesn’t sound like would be the case.

@BelknapPoint Good to know, I’ll give the car some thought. I was under the impression that some schools ask about cars owned and date of purchase.

Some do, but I believe it’s a small number. But if the kid needs a car, and he’s going to get a used car… geez, that shouldn’t be an issue for anyone. And the schools that do ask about it possibly count the car as an asset, so it’s not like you would be getting away with anything.