^In a 529 or parent’s Account , it’s assessed at 6%.
Is that always the case with 529 account funds?
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 that could be seen an attempt to circumvent financial aid rules?
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
FAFSA counts 529s as [parents’] assets even if student owned. However , individual colleges, PROFILE schools may not for their own money. They can make pretty much whatever stipulations they please with their money.
In fact, a number of schools have the stipulation in their financial aid acceptance contracts that ANY funds coming into the household mid year like an inheritance must be reported to the FA office. The timing of the receipt of the inheritance should be managed carefully if OP’s son is in a school with such stipulations.
Carefully managed, the impact of the inheritance can be far less on financial aid, and stretch further. There can be a lot of expenses after college to a student that make it difficult to financially balance one’s life , if parents are not in the position to help.
My son took a decent but not particularly high paying job far from home. Getting him set up for this first foray into a career was not inexpensive. It would have been near impossible for a new grad without a bit of a nest egg and/or help from family to have done this.
Going for a professional masters or other degrees or certificates to further one’s career prospects is not easily funded with financial aid as it is as an undergraduate. My nephew is going to law school and it’s all loans and parental assistance which he is privileged enough to have. Such prospects can be the financial ruin for young people who borrow it all, and the investment doesn’t pay off.
$100k if managed carefully can make a huge difference in a person’s life. Or it can disappear in little time, if college costs are in the picture. It’s frightening to me that it doesn’t even cover 2 years at some of our private universities. It is smart investing, management to make it go as far as it can.
It is always possible for OP’s son to gift the money to his parents once it is distributed to him at age 18. Technically, a Form 709 should be filed the following April; the excess over the gift tax exclusion ($30K if both parents are the donees) will reduce the son’s unified credit, which is currently over $11M.
The $100K inherited will not appear on any income tax return. Nevertheless, an upstream gift of the $100K would appear on a Form 709 filed in the year after the gift is made, but Forms 709 are not normally part of the financial aid process.
Any assets held in the parents’ names as of the date the FAFSA and/or Profile is filed (or presumably when the scholarship application is filed) would be treated more favorably for purposes of need based aid than if held in the student’s name. This is also true for parent-owned versus student-owned 529 accounts.
OP should have a quick conversation with a tax planning professional who is also familiar with financial aid policies. Receiving these funds at 18, some time after the original testator passed, implies that the funds are now in some sort of trust account held for the benefit of the inheritor. Timing could actually work here in the OP’s favor. Presumably, assets held in trust for the son would need to be disclosed and would be assessed as a student asset. However, once he reaches 18 he can give the money to his parents, thereby reducing its impact on need-based financial aid and scholarships.
Again, a quick talk with an accountant or other professional familiar with financial aid policies is warranted.
“FAFSA counts 529s as student assets even if student owned”
This appears to be a typo, it should say parent assets, even if student owned.
“Any assets held in the parents’ names as of the date the FAFSA and/or Profile is filed…would be treated more favorably for purposes of need based aid than if held in the student’s name. This is also true for parent-owned versus student-owned 529 accounts.”
The second sentence is incorrect, they are treated the same. So there is no need to start gifting the money around to put it in the parents’ name, just use a student owned 529 if no other options (such as a Roth IRA) are available.
Then this would appear to be a no-brainer: place the $100K in a student-owned 529 if the main purpose is to lower the imputed contribution from student-owned assets for purposes of FAFSA and/or the Profile. I guess I’d still give some thought regarding the scholarship, though. Is OP confident about how assets are assessed for this scholarship?
529 accounts owned by students are assessed at the parent rate for FAFSA purposes. For Profile, that might not be the case.
@BelknapPoint is better at explaining this than I am…but there is no tax consequence in the year the gift was given…it’s a lifetime gift amount. The giver would need to complete a form if in excess of $15,000…but unless they gave gifts in excess of a HUGE amount over their lifetime, there would be no tax consequence.
How will this help? Unless the student spends the money on something else, it will still be an asset when he files the FAFSA a year later.
Someone upstream mentioned gifting the money to his parents. This would need to be done with NO strings attached…none. In other words, the parents could spend the money any way they wish, and no expectation it will be given back to the student after college graduation. In addition, the $100,000 would then become a parent asset anyway…which would be assessed the same way as a 529 owned student asset.
We had a relative die shortly before our first kid went to college. Our inheritance wasn’t huge, but the relative would have been more than happy to help fund college costs, which is what we did. We viewed it as found money…and were so grateful to have it to help with one of our biggest expenses…paying for college. I’m having trouble understanding why this student and family don’t want to use a portion of this money towards college expenses.
The Profile also appears to treat a student owned 529 as a parent asset. Specifically:
“Current value of all trusts the student is a beneficiary of:
Include the value of all trust accounts as of today, regardless of whether the income or principal is currently available. Do not include funds held in 529 plans.”
If that were my kid, and financial aid were involved, I would do what is possible to time the receipt of the inheritance so it impacts the aid the least and strongly suggest that the kid gift the money to me. It’s the parent posting here, and I suggest the idea be presented. Yes, there is risk the parent makes off with the money because as I stated in my post, there can be no conditions attached to the gift. The parent likely can do more with the money— in my case I can get state tax deductions for a 529, in some states even carry forwards in deductions, in MD for 10 years! A college kid is highly unlikely to have the income to take advantage of such deductions. Average college kid isn’t going to be stashing money into an IRA, Roth or otherwise. Much more flexibility most of the time with the parent.
It’s not the tax implications of the inheritance that are at issue here. FAFSA , PROFILE and other financial aid documents often address UNTAXABLE and UNTAXED income as well as taking AGI from the tax filings. A monetary gift to a parent is not included in FAFSA. To the student it is. Them’s the rules. In my limited experience, the FA office is very interested in any money or benefit a kid gets from anyone other than the custodial parent. Grandma’s and NCP’s 529s paying costs for the student are reported as income to a student for financial aid purposes. How an inheritance to a student is treated by FAFSA specifically , I do not know, but I guarantee that some schools out there paying out fin aid from their own funds will include it.
CPT- I’m not being argumentative.
But for the sake of clarity- yesterday the kid was from a low income family and had no assets. Today the kid is STILL from a low income family but has 100K available to pay for college.
How is he worse off? MAYBE he’d get a big merit scholarship which only goes to low income kids (but maybe he’d be third runner up and get a check for $100 and a photo Op). Maybe he’d qualify for more need based aid, or maybe he’s applying to schools which gap, or offer the Pell, federal loan and a “good luck, kid” because they don’t meet full need. In any event, if he uses ALL of his money to pay for college for freshman and sophomore year, he’s back to being needy junior and senior year, and presumably qualifies for need based aid then.
What am I missing and how is inheriting 100K EVER a bad thing? Colleges don’t charge MORE when you have money, it’s that they can (but not always) charge you LESS if you don’t have it. Why not go for the sure thing- 100K available for tuition, less whatever the kid can legally stash in an IRA if he’s got earned income?
An inheritance is not income ( @belknappoint or @mommdc, correct?But the amount you have in your accounts the day you file the FAFSA or Profile IS considered an asset.
Re: the Profile using the asset as though its the parent asset…this still does not tell you the actual %age of that asset the schools using Profile actually USE in their calculations. Some use more than others.
But, is it not already an asset of the student? If it’s in a trust for the student, regardless of when the trust dustributes to them, it’s still a reportable FAFSA asset. I know that that’s how it works for a parent beneficiary of a trust.
A lot of things are not income for tax purposes are so counted on FAFSA and by schools for financial aid. I do not know specifically how A student Getting an inheritance is reported. If the parent inherited the money, was gifted the money , no tax implications, not income on FAFSA, only assets if sitting there on. filing date and not sheltered. But a kid gifted money is supposed to report it on FAFSA. But rules don’t always make sense. If some one gifts you money, money no tax liability to you. You find it on the side of the road, it’s supposed to be reported and taxed ? Yeah.
@blossom, the student is certainly potentially in much much better shape with $100k dropped into his life. What I am addressing here is the best way to plan for the use of the money so the student gets the most out of it. In that situation, I would not immediately it sitting in an account fully paying school costs if some of it can be sheltered. It’s just smart financial planning. As I stated above, it’s unlikely that a young person that age is going to be able to make a qualified retirement plan contribution. Or get any tax benefit from State income tax if in the picture, by sticking it in a 529.
As long as it’s done legitimately, no reason why student shouldn’t try to keep as much student financial aid and shelter the inheritance. I don’t see the issue here. Smart planning.
Did the OP clarify why it was a bad thing? Maybe thinking they would get aid for college and he would have this left over to start his life? The OP I guess can go to a lower priced option maybe even community College then have this for the junior and senior year to sorta guarantee he gets 4 years of college in.
I would still speak to an advisor. Many families that are not used to having this much money around tend not to do prudent things with it.
Regarding having money “left over to start life”…if this $100,000 will help this student graduate from college debt free…then this IS helping him start life…in a huge way.
OP is aware that a $100k windfall can at least reduce, or even possibly eliminate financial aid. Which means that the inheritance can be greatly diminished. Even if counted as 529 -asset only— best scenario, not getting counted as income by the school when he gets it, and if he , that’s about $6k a year less of financial aid. That’s if his school doesn’t look at it as income. He can then remove the money after he finished school paying federal taxes on gains only, and likely very little or no State tax recapture as it’s unlikely kid had much income to take that deduction. Best case scenario is that he pays $18k more in college costs. i
But that’s if his school doesn’t have other rules on the situation. As I mention a number of times, schools can have whatever rules they please on these things and their money. If they look at it as income, he loses all financial aid that year. If he is getting substantial financial aid, it’s likely not from the government. You can’t get $20-30-40-k+ From federal funds. School is throwing in their own money in such cases, and yes, they can take it all over several years with college costs as they are
“As long as it’s done legitimately, no reason why student shouldn’t try to keep as much student financial aid and shelter the inheritance. I don’t see the issue here. Smart planning.”
I agree 100% with this. BUT (and a huge caveat)- “as much student financial aid” is the key. Not every low income kid wins the big “merit but tied to need scholarship.” Not every low income kid gets what he/she needs to even make a local commuter state college affordable if the Pell plus loan won’t cover books or lab fees or commuting costs. Not every kid can figure out the right combination of need based aid-- even with an outside scholarship which stacks- and many colleges would just take that outside award this kid is trying for and cut the need based aid (which most parents don’t understand).
How many of us old timers have spent March and April trying to explain to first time parents why their list of reach/match/safety is irrelevant now that the kid has been admitted to ten colleges, none of which they can afford?
So it’s that dynamic I’m trying to understand. Sure- shelter, smart planning, whatever. But there’s a high likelihood that it doesn’t matter, because unless this kid is unusually savvy about merit aid, there’s a strong chance he’s going to NEED the inheritance to get through four years with a BA without loans.
Yes, he may well NEED that inheritance. But it will go a heck of a lot further sitting as a parental asset at many schools, particularly schools that give a lot of financial aid.
If kid goes to local state U where all he’s going to get is PELL and loans anyways , yes, he may have to use every penny of the inheritance and some to get through with little or no debt. We don’t know the particulars of his situation
I know if Case Western Reserve is funding him, they ‘d want to know about that inheritance immediately, and I’ll bet they will count it as student income that year and take it. Some schools are very aggressive that way. They have a contract in place that you sign committing yourself to letting them know of any money that comes up during a school year
Profile is only a reporting tool. The treatment of what’s reported is up to each individual school that uses Profile. My experience with Profile is that unless otherwise instructed by a school’s financial aid office, funds in a student-owned 529 should be reported as a student investment.
“Profile is only a reporting tool. The treatment of what’s reported is up to each individual school that uses Profile.”
@BelknapPoint But if the Profile instructions tell you not to report the student owned 529 as a student investment and instead to aggregate it with other parent assets/investments, how is it possible for a college to back that out and treat it differently (assuming they don’t pick you for a deep dive and ask for specific bank statements etc)?
Although slightly indirect the instructions on page 24 of the link above appear to confirm that the expectation is for the 529 to be aggregated with other parent investments:
“Total value of parent assets held in the names of their children:
Include funds in custodial accounts, UGMA (Uniform gifts to minors) accounts, or other savings and investment accounts for the student’s siblings who are under the age of 19 and not enrolled in college.
Funds held in 529 college savings or prepaid tuition accounts should not be included here, but should be included as one of the parents’ investments.”