Structured Settlements v Conservatorship impact on financial aid

Hi. This is more a question for those who have a structured settlement (for the person entering college) or a conservatorship for that person. What have the financial impacts been when applying for financial aid? We are currently looking at both options as part of an insurance settlement for a minor and are wondering how to allocate the funds. Based on what I have seen and playing with EFC calculators, it appears that putting money in a structured settlement has less of an impact on EFC. Is that accurate? I have read things on having a conservatorship because that is considered an asset of the student. However, I am having more difficulty finding information on the impact of a structured settlement. If anyone has experience with that area, I would love to hear it. Thank you!

What are the proposed terms of the structured settlement?

Funds from either source, placed in a student-owned 529 account, will be treated as a parent asset for FAFSA purposes. Treatment by Profile schools for institutional aid consideration in this scenario will depend on each school’s policy.

How old is the child and how many years until college?

@BelknapPoint From what I understand, this is a structured settlement resulting from a personal injury and would be a tax-free annuity that would be owned by the insurance company which would make payments according to the determined structure. Is that still considered an asset of the student?
@blossom The child is 12 and 6 years to college

I would say that any part of previously made settlement payments that are available for the child’s use (presumably under the control of a guardian, conservator, trustee, etc.) need to be reported on financial aid documents as a student asset, unless, as noted in my earlier post, the funds are placed in a student-owned 529 account.

@BelknapPoint Thank you. Just curious, is this information based on experience or interpretation? I’m not sure if the nuances of the structured settlement are being conveyed. Or maybe, I just don’t understand. My understanding is that with a structured settlement, the money is contractually not accessible for the child’s use until the contracted dates of disbursement. Is that still an asset? Thanks

OP- if this is a large amount of money, it’s worth an hour of a lawyer’s time. If the goal is to have the funds available for the child’s education but the kid gets an annual payment for the next ten years, what’s to stop the 18 year old from buying a Ferrari-- or if it’s not that much money but still sizeable, blowing it all on a scuba diving vacation every year? I think financial aid may be the least of your worries!

@laughinglight

You mention this is a personal injury settlement. Will this child need any of this money for any kind of rehab, therapy or whatever as a result of the personal injury? If so, this needs to be accounted for.

Is this your child, or someone else’s?

An annuity would still be the student’s asset. Just because it’s not available to the student doesn’t mean it will not eventually be available to them. The same would be the case with a trust set up to disburse at the age of 25. Otherwise it would be too easy to “protect” assets. It sounds like the parents are trying to decide between a single lump-sum payment vs. an annuity. If that annuity would stretch into the college years, I would think a lump-sum would be the better option, for two main reasons: 1, the money is liquid, and would be available to pay the tuition and other bills, rather than paying off loans after the fact. 2. all income (even if non-taxable) would be in the first year, well before the need to file FAFSA. With an annuity, each year there would be an annual payment that is considered income, and income is treated less favorably than assets on the FAFSA.

My husband has such a settlement from a dog bite when he was a child. He used it up paying for college. Since it looks like 6 years before applying to colleges, the money could be gone by then, if there are medical or other expenses associated with the injury. Again, it’s better to have a more liquid asset.

From experience and interpretation, the structured settlement funds are not reportable on financial aid documents until they are disbursed.

The personal injury attorney who negotiated the settlement should answer the question for you. You shouldn’t have to pay more for understanding a settlement that the attorney was paid presumably on a contingency to negotiate.

You could also ask the annuity company itself how the annuity is treated for financial aid purposes. You will want to know the answer for this specific annuity; someone else’s experience may not apply to you. Annuity terms can vary quite a lot.

Conceptually, the funds are earmarked to pay for disability-related expenses, aren’t they? If so, a financial aid office would be able to answer how they deal with assets like that. I would guess you report the income, along with the additional medical expenses as a special circumstance. But not the undistributed portion.

The most analogous “normal” situation I can think of is when a parent is taking required minimum distributions from a retirement account, but they spend the money medical expenses. How is that treated for financial aid purposes?

An annuity company or a personal injury lawyer will have no idea how college FA works. Most accountants don’t know how it works. The best way to find out would be to fully understand the terms of the various options. That’s where the lawyer will be helpful. Find out how and when the funds will be disbursed, at what age the child will have access to it, and whether some or all of the funds will be used to pay for medical expenses. Once you know the answer to these questions, a financial aid expert would be able to tell you the likely effect on FA.

That said, a conservatorship is like a trust. Trusts must be reported and will affect financial aid – even if the child cannot access it until older.

As for the structured settlement … I am thinking that it’s not much different from a a tenured teacher’s or professor’s salary. The person only has the funds (as income or asset) that have already been disbursed. More payments are coming in the future. But if he doesn’t have it yet, it’s not income, not an asset. That’s just my take.

It might be worthwhile for you or your attorney or financial advisor to contact a financial aid officer at a college or university for some insight.

Without all the facts, any advice offered is just a best guess. An important consideration in this matter revolves around restrictions. These are restricted funds, but restrictions can vary from just an annual payout to the annuitant to be used as the recipient desires, to an annual payout which is restricted to use for only certain expenses such as rehabilitation healthcare, rent, utilities, food & other medical care. These facts matter.

I don’t see how a structured settlement ISN’T an asset. You can borrow against them, you can sell them, you can access the money in them (at a discounted rate).

I agree that an attorney or the annuity company will not know anything about financial aid rules, especially financial aid rules and tax rules 6 years from now.

Wouldn’t that depend upon the restrictions of the settlement ?

Remember this too…need based financial aid is largely based on parent income and assets. This kiddo is six years away from college…so four tax years away from the tax year that will be used for financial aid purposes.

The parent income and assets could very well be above the threshold for receiving need based aid anyway. Remember also that the very vast majority of colleges do not guarantee to meet full need for all students.

All of these financial gymnastics need to be considered in the whole family financial context.

You can borrow against the structured settlement. What you get for it will depend on the restrictions, on how the payments will happen. It’s up to the lender under what terms they’ll lend or buy the structured settlement.

I don’t think you can just ignore an asset because it isn’t paying for years. You can’t ignore a second home even if you don’t use it or won’t see value from it for years. You can’t ignore a CD that won’t mature for years.

You may also be able to borrow against the equity in your primary home. While the equity in the home is not a reportable asset on FAFSA, if you monetize that equity, either through a sale of the home or by borrowing against it, the cash you have is now reportable.

But the powers that be have excluded primary homes from being reported on FAFSA. It’s an asset that is specifically excluded. If you turn it into a liquid asset, it’s no longer excluded.

Also excluded are the corpus of qualified retirement funds. The FAFSA formula doesn’t have to exclude these as they are clearly assets, but again those making up the formulas decided to exclude retirement accounts and they aren’t counted as assets. We’ve seen people argue on here that their CDs and money market accounts are for retirement or medical care, but the FAFSA still requires those to be reported as they aren’t, as defined, excluded.

A structured settlement, insurance proceeds, or a conservatorship could be excluded, but the question is are they? IMO they are not.

There are lots of assets that are not reportable on FAFSA and are also not specifically excluded from reporting, yet if the asset is liquidated or borrowed against the cash from a loan or the sale of the asset would be reportable. Automobiles, jewelry, household goods, etc. The list is virtually endless.

Funds that are under the direct control of a student or a parent, or a representative of the student or parent (a trustee, conservator, or guardian for instance) are generally reportable. Funds that are not under direct control but for which there is a future expectation (like the expected payments from a structured settlement) are not reportable. If a student is the beneficiary under a life insurance policy and the insured person has a terminal illness with a life expectancy of six months, should that death benefit be reported on FAFSA even though the insured person is still alive and the student has not yet received anything from the insurance company? If a student is named as an heir in the will of a wealthy 95 year-old relative, should the reasonable expectation of a future large inheritance be the basis for reporting the expected inheritance on FA documents, before it’s actually received by the student? If a student’s parent has a guaranteed employment contract for the next 10 years that pays out in monthly installments, should the full contact value be reported on FAFSA, even though the great majority of that amount isn’t immediately available?