My son is set to come into a $100,000 inheritance at 18. As our incomes are currently and then will qualify for Federal Aid we had planned on him applying for based needs scholarships. Will schools/scholarships consider his inheritance in their weighing of his scholarships? While many applications for scholarships will happen before he is 18 (and inherit the money.) However, he has one scholarship that he is already making many inroads to achieving, and that scholarship does not go on line until senior year and he will already have inherited the monies. My son would be crushed if all the work he has done already toward that particular needs based scholarship, would all be for not. How would we get guardianship of the monies? I realize in the news there are a lot of parents trying to side step scholarship rules, though day in and day we barely make ends meet and obviously we were never planning on a relative dying and leaving that kind of monies to an 18 year old. Thank you.
It will be an asset of the student at the time of inheritance. We’re in a position where we’re the beneficiary of a trust that will not distribute a penny to us until 5 years after our last child graduates, but it is still reported as an asset on, say, FAFSA. Really stinks.
Where is the money now?
And why would your son be crushed? He won’t be expected to use every single dollar of his inheritance freshman year (i.e. they don’t charge more for tuition if you happen to have money sitting around vs. if you don’t), and this way- it’s a sure thing that he’s got the 100K, vs the risk of doing all the work and then NOT getting a penny from the scholarship. i.e. he’s no worse off.
Run a couple of the net price calculators at school’s he’s interested in to see the impact of him having the money the day he files FAFSA vs. not having it. The financial impact might be less than you think. And if he has a job with earnings, he can open an IRA and fund it immediately (up to the legal limit of course) which will shelter some of the inheritance from the financial aid calculations.
Always better to have more than less- even if you don’t think so. Do the math.
So there are attorneys, accountants, brokers or combinations of those that can best set up a strategic plan for the money and investment. I suggest you contact someone right away and set up a plan to protect your interests.
If it’s too much work I still have two in college and can make that money disappear quickly ??.
He should open up a 529 with the money, then for FAFSA purposes it will only count at the parent rate of 5.64% for assets not the child rate of 20%. He can always take it out later on (since the penalty is only due on earnings rather the entire amount, if is not used for education)
If inheriting $100,000 will be such a crushing experience for your son, he can always disclaim (refuse) the inheritance, have it go to someone else, and not have his work for the particular scholarship be for nothing. Problem solved!
@BelknapPoint is there a $$ limit on the amount that can be put into a 529 account? If not, this would be a good place to put that inheritance money.
@money4son if your son has that money in his accounts when he files his FAFSA or Profile forms, they will be considered his asset…and they will be counted for need based aid consideration.
If you really don’t want this money used for college…then have your son apply to places where he will get pure merit aid only…as merit aid is not income or asset dependent.
Otherwise…I do have to ask…why wouldn’t he want to use some of this money as an investment in his education?
I don’t understand why he would be crushed to invest in his own education. The line for paying for your son to attend college starts at your house; this includes his money also. The point of receiving need based aid is not for him to use other people’s money (where do you think the aid comes from; the generosity of others who give to the school) so that he could pocket $100k. Him having this money may give him the gift of graduating from college debt free.
As others have stated he can look at options where he could get merit money that is not contingent on income and assets
Each 529 plan administrator determines at what value an account has grown to the size that no more contributions will be accepted, but generally that number is at least several hundred thousand dollars. Even if OP’s son already has a 529 account that is heavily funded, the son could open another account and deposit the $100,000 inheritance there.
I find it amusing that for a student who is counting on need-based scholarships to help pay college expenses, the prospect of inheriting $100,000 is causing such angst.
I have this question too. All the guidance I’ve seen is about other people contributing to a 529 on behalf of the student, in which case the contributor wants to avoid triggering the gift tax. In that case the limit would be $15k per contributor per year (at current gift-tax exclusion threshold). However, you’re allowed to make a five-year contribution, which would be $75k per contributor. I’ve seen NO guidance on annual limits if the student himself is contributing his own money.
So the question is, can the student put the entire $100k in a 529? If so, his potential financial aid award would be reduced by $5,640 in the first year. If he didn’t use the entire 529 on qualified educational expenses by the time he graduated, and earned $10k in interest over the four years, he’d owe $1k in penalty plus income tax on the earnings, which would presumably be low in his first year out of college. Another option would be to keep the 529 for his future children.
@brantly
What are you talking about. First, this is an inheritance, not a gift.
Second…the “gift tax” isn’t something one pays whenever they exceed $15,000 a year in gifting. There is a lifetime amount gift tax exclusion amount… @BelknapPoint has explained this before. Really all over $15,000 in a year does is the GIVER needs to complete a form. Big deal. Oh…and $100,000 even if it was a gift is WAYYYYYY below the lifetime gift amount. Way below.
Third…the money would be coming from the student himself to fund the 529. That wouldn’t be a gift…you don’t give gifts to yourself.
@money4son you haven’t said who left your son this very nice inheritance. Wouldn’t that person be happy to see at least part of it go for your son’s college education? Think of it this way…it’s $25,000 a year your son wouldn’t have otherwise had. It could mean that he could attend college and graduate debt free…which is a BIG gift that will just keep on giving…as he enjoys his adult life without college debt at all. That is a wonderful gift, in my opinion.
I agree — your student should search for merit only scholarships where his finances are wholly irrelevant. Congrats to your S and good luck!
Yes, unless a $100k contribution would bring the account over the plan’s account limit at which point further contributions are not allowed.
Note: I am not an attorney.
He likely has already inherited the money and it is in some type of trust account. It is an asset of his today and would have to be reported as such.
You don’t. If it is in a trust that gives him rights at 18, he can do whatever he wants with the money. Even if your son gave you legal rights to manage the money it would still be his asset. If you went as far as putting him under a conservatorship (i.e Britney), it would still be his asset.
On the idea of putting it in a 529 so that it counts as a parent asset on the FASFA, it looks like the Pell Grant goes to $0 somewhere around $45k in AGI with $100k in parent assets.
I think you misread what I wrote. What I said was that all the guidance that I have read about 529s gives advice AS IF someone else (who is not the student) were contributing to the 529, and ALL of that guidance says that for the person giving the money, it is considered a gift and that it’s best to limit one year’s contribution to $15k so that the GIVER (parent, grandparent, etc.) avoids gift tax.
Before @BelknapPoint chimed in, I had not seen any guidance about maximum contributions if the student himself is contributing the money.
Here’s one source:
Thanks. This is helpful. It would not exceed any state’s limit, as the lowest ceiling is $235k AFAIK.
OP, you’ve asked an important question. Of course, you will want to come up with a strategy to keep as much of that inheritance as possible. It’s smart financial planning.
My friends with two kids in college were getting about $20-30k in financial aid when a parent got a large company payout that was earmarked for business start up which would be what supported the family for the next whatever years.
The colleges did not look at it that way. It was income and the kids no longer qualified for financial aid. Back then, to them, $20k was a lot of money. Finances were going to be tight as they had been for the last few years , particularly to maintain their way of life which though nice was not luxurious. So the kids took a leave of absence that year. Helped out with getting that business off the ground, did community service, took a course or two to keep the academic juices flowing. When they resumed college, they got a bit more aid, than the first two years.
The year your son gets the money, it will wipe out is financial aid as student income gets hit 50% after a given amount ~$6-7k, I’m not sure exactly. It might be a good year to take as a gap year. Many kids take such years. Community service, a job, travel, take a course or two at the local college. A lot of possibilities. It could cost a lot less than the loss in fin aid would that year.
If he has the money in following years, it is hit at 20% with no protection allowance. If a 529 is opened and the money placed there, it is assessed for FAFSA purposes at the parent % of under 6% . How the account is set up can determine how PROFILE schools and other schools that use an additional formula for their own aid. I don’t know how your sons college will assess a 529. There is also the possibility that all of this money might not be used for education purposes. If your son has plans to continue school, if this is the best place to put the money, fine. But perhaps a Roth IRA if he has earnings to support the contribution, or other place would work out better.
Or, your son might choose to give you the inheritance to use for your own needs as many of us want to do for our parents. If he turns it over to you, then , it’s yours to do as you please. You could open a brokerage account, savings account, mutual fund account . FAFSA hits up parental assets at about 6% after a protection allowance, we are talking about $6k added to your EFC. You can look up if your state has deductions for a 529, put some of it in there—some even have carry forward deductions allowed. Limits vary as to how much you can deduct per year and how much can be put into a 529. It’s pretty clear that you may have more options with this money than your son does.
This sort of strategic planning is no different than what many of us do, to get as little if a hit as possible on income and assets from college financial aid, paying taxes, financial planning in general.
An inheritance is not income and isn’t considered that way for taxes or FAFSA. It’s just an asset, so assessed at 20% if is a kid’s asset (no allowance) or 5.6% if a parent’s asset (with an allowance based on age of parent). Good idea to put it in a 529, or buy a car, or whatever he needs for college before filing FAFSA.
You know, I do not know whether inheritances that a STUDENT receives are included as untaxed income or benefits. It is not specifically included, but not excluded in the examples given on the FAFSA instructions . @kelsmom would be the best person to address this. I had heard that the fin aid officer has tremendous discretion on how inherited accounts, assets and trusts are handled. I believe that a parent inheriting money could exclude it from income as they can any gifts, but a student? If it’s pure money they are getting, it seems to me that it is so included as are any monetary gifts. If grandma, alive , gives college kid a large sum of money like $100k, it’s included. But is she gives it when dead , it’s not?
I know PROFILE schools in particular have a lot of latitude on how to financials for their own money.
It would mske things even easier if that is the case. that inheritance is not income in year it is received by student. As long as the money is not owned by student on the day the FAFSA is filed, if it is given in good faith with no strings attached to , say the parents, then it’s not included in the students assets and assessed at the more draconian 20%. In a 529 or parent’s Account , it’s assessed at 6%.
I think I’d call and get an answer from someone at the FAFSA number or the college financial aid officer on this one, as to whether a student getting an inheritance has to declare it as untaxed income on the FAFSA or if is exempt.
Maybe I’m missing something but, Even if a 529 was opened and funded with the entire inheritance wouldn’t it all still be assessed at the student rate and not the parent rate. The 529 would be owned by the student, funded by the student for the benefit of the student. I don’t see any benefit as far as reducing available assets. It isn’t the typical situation where the parent owns the account and funds it with parent money for the benefit of the student where the funds would be assessed at the parent rate. If the account were owned by the parent but funded by the student wouldn’t that then be a gift to the parent in an attempt to circumvent financial aid rules? That could face mor scrutiny.
I agree with others who said that an inheritance to an 18 year old may have been intended to help fund college and it is money that your student doesn’t have to hunt for elsewhere.