<p>My husband and I are in the under 35 thousand a year bracket and have been looking into all aspects of our presently 17 year old daughter attending college in July of 07. She will be a senior in H.S. this year and will turn 18 in Feb of 07. We were very unexpectedly advised the other day of her being the beneficiary of an annuity. Lump some of $50 thousand. By next week we will need to know what action to take with this, right now we are basically in shock. We are wondering how this will affect her financial aid. Since this is the only lump sum of money she is ever likely to recieve we would like her to still have some left after college. The college she wants to attend is $46 thousand and will require her to live in an apartment in another state and off campus and also work part-time. Also, what might be the tax ramifications of this. We are not sure where to look for answers and have not decided if and when to tell her about this, though we are pretty sure her decision would still be to go to college. We were thinking of maybe keeping it in a trust for her till she is 21 if possible with her dad as the guardian.
Does that make sense? Would that then be considered our asset? Any input would be appreciated? Thank you in advance!</p>
<p>I'm not 100% sure but I'm pretty sure the $50K will be taxed as income (at her rate) then the remainder will be considered by FAFSA (whether in a bank acct or trust) as an expendable asset. After all the money is clearly available for use to pay for her eductation.</p>
<p>Yikes. Try and keep it/get it out of her name. If it makes it under her name you'll take a big hit.</p>
<p>This is one that you need to discuss with an accountant/attorney. You need to consider your overall finances, not just FA. And part of the answer will depend on the terms of the will under which your daughter received the inheritance. There are too many variables for Internet advice to be worthwhile.</p>
<p>Here is one of those "Internet Advices" :rolleyes:</p>
<p>Donate 25K to Red Cross and other 25K to Democratic Party</p>
<p>Many ways to take a distribution from an annuity.
Minor cannot receive a distribution unless through a custodian/trust.
Annuity is basically a "retirement program" like an IRA.
I'd contact the annuity company first because 1) no cost, 2) they have more information about the annuity and distribution 3) It is in their interest in Not distributing the $ as a lump sum 4) Lawyer/accountant/Financial Advisor/Bank will also have to talk to the annuity company for the same information that you will get but will be filtered to you.</p>
<p>Yeah-- if it shows as an asset in her name, FAFSA formula will assume 25% or $12,500 is avail the first year for college, so your aid will be reduced by that amount. BUT if it's in your name, and you have an AGI around 35K, it probably won't be counted at all (since you'd be eligible for the simplified means test).</p>
<p>If you can arrange a distribution where she only gets a small amount the first 4 years, and then the lump sum in January of her Senior year, she can use the lump sum to pay off her student loans, and the inheritance won't significantly hurt her financial aid package.</p>
<p>Profile may be different-- and I don't know about the income tax situation.</p>
<p>Hmmom, you would best be advised by a professional financial advisor/counselor who has worked with alternatives for distribution of annuity funds for beneficiaries. I would do this very soon. Find somebody who is AICPA affiliated and who is focused in "Personal Financial Planning". This financial expert will be able to consider your personal financial situation and give you an informed opinion of your options based on your income, assets, etc.</p>
<p>That said, there are options that may be available. I'm not an expert, so I won't advise you; however, you may want to consider a trust alternative. See the following and then talk with a personal financial planning expert:</p>
<p>Thank you all for your answers! As NorCalDad suggested I am studing the link provided and considering finding someone involved in "personal Financial Planning" and hoping that it is not a very expensive option since this our daughters money and not ours.</p>
<p>sblake7's suggestion was very close to what I was thinking about but don't know how to go about doing it. Our AGI is below 35K. Since she is a minor until February I believe it will go in my husbands name as custodian, but we do not know if this would appear as her asset or ours. I do not know how we would go about getting it from her name to ours.</p>
<p>Besides all of this, there is taxes to consider, this is all so confusing. Maybe the best thing would be to put the whole thing in a cd for two years and let the chips fall where they may.</p>
<p>Whatever we decide I thank you all for your imput!</p>
<p>Hmom-just to clarify</p>
<p>As to FAFSA (not the PROFILE) and federal financial aid (Pell grants, Stafford loans, etc). First, FAFSA is a computer program. As calculated by FAFSA, an EFC is a sum of a percentage of four factors-parents income, students income, parents assets, and students assets minus the standardized deductions FAFSA allows. You file (preferably online) and based upon what you inputted, the computer program (FAFSA) spits out a number, or EFC. When determining federal financial aid, aid officers rely on the EFC as calculated by FAFSA. There are two exceptions to the FAFSA calculation (the automatic zero EFC, and the simplified needs test). </p>
<p>Under the simplified needs test, if the parents AGI (as reported an a federal tax return) is under 50K and the parents use a short form (1040A or 1040EZ), then two of the factors (parents assets and student assets) will not be used when your EFC is calculated by FAFSA. FAFSA will automatically exclude all family assets if you meet the simplified needs test. However, this will only apply to federal financial aid. </p>
<p>Aid officers can tinker when it comes to granting their own schools money. It appears that your D is interested in going to a school (46K?) that may delve much more deeply into your familys situation either by PROFILE or their own financial aid forms. The PROFILE does not have a simplified needs test. Family assets are more likely to take a hit if the school uses the PROFILE. And if the money is in Ds name, as Sblake above indicates, it will be hit hard. The good news is that FAFSA/PROFILE want to know about assets on the day you file, so you have some time. As I understand it, the worst place the money can be on the day you file is in Ds name. Good luck</p>
<p>Hmmom,</p>
<p>Jugulator20 makes a very good point... $46K as an approximate cost of attendance implies a private college that likely will utilize both the CSS PROFILE (College Scholarship Service of the College Board), as well as the FAFSA application/form. </p>
<p>Depending on whether she chooses to apply ED/EA or RD, the CSS PROFILE is usually due on Dec. 1 for ED/EA applicants and in mid-February for RD applicants. The FAFSA form is usually due as soon as possible after parents have received their W-2 forms confirming income for previous year.</p>
<p>The CSS PROFILE is mostly used for "institutional" financial aid (most often, institutional grants), whereas FAFSA is used for "federal student aid" (e.g., Pell Grants, Stafford Loans, Federal work-study program). The financial aid package that a college may offer will combine aid components from different categories affected by either the CSS PROFILE or the FAFSA methods for determining aid offered.</p>
<p>The CSS PROFILE will consider more in calculating personal asssets than the FAFSA. Not all colleges will use both forms, so check with the school's financial aid office to see what they require. Notably each can result in a calculated EFC (Expected Family Contribution) that may be very far apart (by $10K or more).</p>
<p>Be careful when looking at ways to minimize your financial aid "hit". Your daughter will need to fill the FAFSA (and profile/CSS if the school uses it) every year. Filling out the forms just before she gets a distribution will only help the first year and then the aid will change significantly. Make sure that whatever you do will work for the whole 4 years.</p>
<p>Trust funds go into the need based analysis. If you want to move the money without affecting the child's eligibility for financial aid, try a retirement annuity or life insurance annuity. The down fall is that the money won't be freed up for use in both types of annuities. When assets have liquidation problems, those assets are generally not weighed in the need based analysis formula by financial aid departments. For instance, a variable unit life insurance needs an initial principle or a period of time that money goes into it before the person contributing can take anything out, usually a number of years anywhere from 3-7, more or less. And after the intial time frame, the person recieves a per month or per year amount based on the company's interest rate for principle bracket annuities. Putting the money in offshore investments is also a good way to avoid the need based analysis. Its not cheating the system or in anyway illegal to perform such acts mention.</p>
<p>The downfalls of variable unit life insurance is that money is taxed heavily when trying to remove the entire lump sum or a large portion for that matter. Not to mention, it is taxed heavily after death. Essentially, variable unit life insurance is meant for individuals who want to spend the interest earned on the accounts.</p>
<p>After looking through so many options, I came across what I think might be worth looking into. Having her money transfered into a 529 savings plan. Is anyone familiar with these? Evidently a 529 is not even counted on FAFSA. We finally made an appointment with an Edward Jones investment person, it just seems too complicated to figure out on our own. I want to go in there though knowing a few things. If anyone is aware of these 529 saving plans, your opinion and advise is very welcome. The school she wants to attend is in California if that makes any difference.</p>
<p>It does look like for the 2006-2007 year there is wording that allows this-
the question is, is congress going to fix it?</p>
<p>
[quote]
Theyve saved some income taxes by having the investment earnings reported on Billys tax returns through the years. But Billy will be enrolling in college this fall and those investments are now going to be assessed at a 35-percent rate in determining Billys eligibility for federal grants and subsidized loans. Under the new law, John and Jill can dramatically improve Billys aid eligibility by liquidating his current investments and moving the money into a 529 plan with Billy as both owner and beneficiary. Provided the assets are moved to the 529 prior to filing the FAFSA, they will be removed completely from consideration.</p>
<p>Loophole is probably too strong a word to describe this technique. Congress clearly wants to encourage the use of 529 plans and ESAs and was deliberate in changing the financial-aid laws so that college savings plans would not be subject to the punitive 35-percent rate. Did lawmakers realize that families would simply shift any student-owned assets into 529 plans to increase aid eligibility? Perhaps not. I understand there has been some questioning from a Congressional advisory committee, suggesting a bit of confusion as to whether a minor can be owner of a 529 plan or ESA. </p>
<p>Here is where things currently stand, in my judgment:</p>
<p>-The law as written permits dependent students owning 529 plans and ESAs to exclude those assets from the FAFSA. If Congress decides that the changes enacted in February created an unintended loophole, it may seek corrective legislation. </p>
<p>-The financial-aid changes are effective for the 2006-07 school year. If you have already filed a FAFSA including a student-owned 529 account, you should consider submitting a corrected FAFSA to exclude it. If you havent yet filed the FAFSA, you can change your 2006-07 aid picture by moving assets into a student-owned 529 plan before you file the application. </p>
<p>-The benefit of moving money into a student-owned 529 account will decrease next year (the 2007-08 school year) as the asset inclusion factor for student-owned assets is dropping from 35 percent to 20 percent. </p>
<p>-Moving money from a student-owned or UGMA/UTMA investment into a 529 plan requires that the investment first be liquidated. Capital gains may be triggered causing income tax and a possible decrease in financial aid due to the income inclusion factor. Careful planning is necessary. So is an accurate assessment of your financial-aid prospects. </p>
<p>-Dont be too quick to shift your parent-owned investment assets, including your own 529 accounts, to a 529 account under your childs ownership. (If the student is a minor, most 529 plans will require an adult custodian on the account.) The potential financial aid benefit is smallparent assets are assessed on a sliding scale that tops out at only 5.64 percentand the transfer is irrevocable. If Congress decides to re-work the laws, it will be too late to take your money back from your child. </p>
<p>-Theres been no change with respect to grandparent-owned 529s naming the student as beneficiary; they are not reportable on the FAFSA. However, the U.S. Department of Education has yet to clarify whether a distribution from a grandparent-owned 529 plan to pay for the students college expenses is reportable as student income.
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<p>If it's in your husband custodianshp while she is a minor , I would file the FAFSA as soon as possible in Jan 2007 before it's transfer to her name .</p>
<p>In the meantime , talk to the annuity company , I am sure they handle situation like this all the time .</p>
<p>I think some of the comments in this thread are way off base, so I think you should get some advice from an accountant or financial planner who is also knowledgeable about the financial aid process.</p>
<p>If the money is from an inheritance, it is highly unlikely that anyone will owe taxes on it -- whatever taxes are owed are usually paid by the estate, and unless the estate is very large, there would be no taxes due because of the phase-out of estate taxes that culminates in 2010. (All that stuff the Republicans are talking about in Congress right now).</p>
<p>Money held in trust for someone is the same as money in that person's name, so it doesn't solve any problems to have your husband or anyone else named as trustee. </p>
<p>Probably the annuity is an asset, not income, and how it is treated may depend on the precise terms of the annuity.</p>