This has been an interesting thread. I’m still confused but do feel more enlightened on this topic. Thank you to everyone who has chimed in, particularly @BelknapPoint and @CTScoutmom!
@BelknapPoint I have no idea how you are able to display quotes from previous posts. My question specifically stems from these 2 comments you made:
- From experience and interpretation, the structured settlement funds are not reportable on financial aid documents until they are disbursed.
- 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.
Are you saying that only the disbursed amount is reportable? I figured that would be the case, but would I also need to report the funds that are owned by the insurance company as an asset? That’s where I’m still confused. Thank you!
You wouldn’t report guaranteed income until it is received because it is not yours until earned/received, for tax purposes or reporting. NFL players have guaranteed contracts and report those amounts as they are earned.
A structured settlement is yours. " A structured settlement is a type of annuity that pays out lawsuit rewards over a long period of time." It is not a future payment but a holding vehicle. Nothing left to chance like an NFL contract. A life insurance policy where the person hasn’t died yet is not yours, and anything could happen up until the person dies. A settlement is after something has happened.
If a person has an insurance policy and dies, the insurer is then merely holding the funds and, at least at the company I worked for, we moved it to a different account (with escrow accounting) - it was no longer our money but belonged to the beneficiary (whoever that turned out to be).
Why wouldn’t everyone just buy an annuity if they didn’t want to report an asset on FAFSA if annuities were excluded?
Yes; there is a contract stating that you will get the funds at a future time based on an agreed schedule. The same is true of a guaranteed employment contract. I will use the example of a MLB contract instead of an NFL contact, which can typically be cut short if the player is released or injured, depending on the terms of the contract. A MLB contact guarantees payment, even if the player is released or injured; typically the only way for the team to avoid payment is if there is some kind of fraud or malfeasance on the part of the player. In both cases you don’t actually receive funds for your use until certain dates as specified in the contract. As you said above, “You wouldn’t report guaranteed income until it is received…”
Yes.
But the baseball income is INCOME, wages earned and taxable, and income isn’t reportable until received. If you work in December and don’t get the payment until January, it’s reportable as income for January and not December, both for the IRS and for FAFSA
Why wouldn’t everyone just buy an annuity rather than have money in a bank account if you didn’t have to report annuities? It would make no sense to have a 529 account and have that assessed at 5.6% when you could just buy an annuity and not report it until pay outs.
Annuity payments are not income (interest could be unearned income), so how would it be reported on the FAFSA? Not income, and not an asset on FAFSA-day if already paid to the college, so how would you report?
We still don’t know if we are arguing about 50K, disbursed over a period of ten years, or $1M, with expected medical expenses to eat up most of that.
We still don’t know if the family’s other earnings and assets are going to disqualify them from aid (mind you, the kid is in middle school) once application season rolls around.
Arguing about MLB and annuities seems pointless to me until the OP clarifies the situation here. And if it’s a large amount of money, my guess is that there are much bigger issues than financial aid on the table, and a consult with a lawyer is likely a good investment. I have seen many situations where a 21 year old kid has chewed through a chunk of money intended for education, or a 24 year old has bankrolled a friends business (everyone loves to get producing credit on a movie or off-broadway show) with nothing to show for it. If the structured payments are not structured appropriately, the kid at age 18 gets to decide what, when and how to spend the money. So I’d start there. Financial aid could be a rounding error.
Blossom is right; arguing about this without having more specifics from OP is basically pointless. However, several points:
I can think of lots of reasons why someone might rather have money in a bank account, liquid and immediately on hand, rather than tie it up in an annuity. And 529s have tax benefits all their own that in and of themselves can make a 529 more attractive than other options, including an annuity.
Annuity payments most certainly can be classified as income, whether the determination is made according to IRS rules or FAFSA rules. I have prepared both tax returns and FAFSA forms that include in the taxpayer’s/student’s reportable income money that came from annuity payments (interest earned and the basis were both fully reportable on the tax return and the FAFSA). There are many different kinds of annuities that can be created from a wide range of sources; making general statements about annuities can be risky.
The following discussion assumes that the payout is in the form of a lump sum, not an annuity, since the value of an annuity would be ignored as an asset by need analysis. Only the annual payment from an annuity would count as untaxed income on worksheet B.
I’ll provide a more direct answer to these questions, using pre-2018 tax forms because until the 2020-2021 FAFSA comes out, we won’t know how the recent changes in the IRS forms will effect the FAFSA reporting.
Annuity payments received in 2017 would have been reported on Form 1040 lines 16a and/or 16b, or Form 1040A lines 12a and/or 12b. The taxable portion (line 16b or 12b) would carry over to be reported on FAFSA as part of the AGI. The nontaxable portion (line 16a or 12a) would carry over to be reported on FAFSA as either student’s untaxed income (FAFSA 45.f.) or parent’s untaxed income (FAFSA 94.f.). That’s how annuity payments are reported on FAFSA (at least until the 2020-2021 FAFSA comes out). Annuity payments retained as an asset at the time of completing FAFSA would be reported in the normal manner for assets (i.e. as part of a savings, checking, investment account, etc.).
What am I missing?
The NUMBER ONE thing I would be concerned with is having liquid funds available to help this person with any medical bills or anything else related to the injury. The very last thing I would be thinking about is college…and how the disbursements might or might not affect college financial aid in six years.
I would want to be absolutely certain that any expenses related to this injury would be covered with the settlement…no matter how it’s structured.
At this point, you can’t predict what this young person will even do regarding college. At all. And you certainly can’t predict the ever changing landscape of college financial aid.
Please consider the needs of this young person as it related to the injury. That should be the number one consideration now.
@thumper1, my guess is the concern is that if the funds are considered in the financial aid calculation they wouldn’t be available for the medical expenses they were intended for. I don’t think 6 years is too far in advance to be thinking about this problem. It is all the more important that the money lasts, and it is a question that takes a lot of research to answer confidently. If something needs to be adapted in the settlement, the sooner it is addressed the better.
The core problem is that the question of a structured settlement’s impact on financial aid requires two experts’ opinions and the likelihood that there is one person who is an expert in both is almost nil (although it can’t be the first time the issue has come up for either an experienced attorney or financial aid officer).
Worse, each side of the analysis is heavily dependent upon the specific facts of this child’s situation - requiring a third expert – the conservator.
If it were me, I would go back to the original attorney and ask about the annuity terms (get the actual contract!) and find out what questions I need to ask the financial aid expert, then go to the financial aid expert and ask what questions I need to ask the original attorney – and go back to the attorney to get them answered. Then I would add in my personal knowledge so I become the expert on the intersection of all three issues. I would then confirm my understanding of what would happen for my specific kid with the attorney, in writing. The attorney has a duty to his/her client to enter into a settlement that is reasonable. If it is foreseeable that this child would go to college and would need financial aid, then the impact on college financial aid should have been factored into whether the settlement is reasonable.
Yes, it would be time-consuming, but that’s why OP is smart to start figuring it all out now.
There seems to be an assumption here that there will be future medical expenses to pay resulting from the personal injury that OP mentioned, and that the settlement funds will be necessary to pay those expenses. We don’t know this. It would be helpful if OP provided more information, but it’s quite possible that there are no lingering injuries, and that the settlement is payment for any number of other claims.
Some settlements have a court ordered mandate to use the funds for medical. That can change the treatment of the funds.
BP, the IFAP documents explain some of the different tretments of trusts/insurance settlements, for Fafsa. Still pretty unclear.
I’m not so knowledgeable on this. But I think the first consideration is that a lump sum distribution will sit somewhere, as unprotected assets, then be used in that whole amount for calculating EFC. A structured settlement would be a smaller amount, annually.
One of the reasons for structured settlements is to protect needs-based public benefits for people with disabilities. Annuities in particular are associated with that use. You’re right. We don’t know for sure, but that we are dealing with a conservatorship, a personal injury settlement significant enough to warrant it be structured, and annuity, all signs point to a disability with ongoing medical expenses.* Still, I did start off by saying “my guess is” - Meaning, I don’t know the facts, just as you say.
As an aside, if this particular annuity works to protect qualification for benefits, it would be logical (although not certain) that it would also protect qualification for financial aid. That’s why talking to the attorney and confirming the terms of the annuity are important. Not all annuities protect public benefits. You would need to know exactly what you are dealing with because the financial aid people might make similar distinctions as benefits people do.
*I am using “medical expenses” in the broadest sense - to include equipment, training, house modifications, etc - not just seeing a doctor.
@BelknapPoint - I should clarify that I agree with you. The principal shouldn’t count. I just think it is also possible that the distributions wouldn’t either, if it is documented that they paid for medical expenses or other extraordinary costs that are reported on the financial aid app.
Assuming it is the “right kind of annuity”, what is necessary to have the distributions be exempted is the first question I ask of a financial aid expert.
But…if this is for medical purposes, isn’t this what a special circumstances consideration would help with when its time for college? The student would need to document what the required medical needs were, and the out of pocket costs for those for the financial aid year. The colleges would then determine if this money should be excluded from the financial aid calculations for need based aid.
Maybe the OP can clarify…is the money needed for medical purposes…or have that potential need? Or are they trying to figure out how to have the money available but not have it counted in the financial aid formula?
[quote]
As an aside, if this particular annuity works to protect qualification for benefits, it would be logical (although not certain) that it would also protect qualification for financial aid. That’s why talking to the attorney and confirming the terms of the annuity are important. Not all annuities protect public benefits.]/quote]
Protection regarding qualification for benefits does not equate to protection from financial aid - financial aid is not a public benefit. Special needs trusts are designed specifically to protect assets, but are in fact included as any other trust as an asset on FAFSA. ABLE accounts are relatively new, and I don’t know if they would be treated similarly to a 529 and excluded, but they also have a cap at $100,000.
Whether the student has any access to the funds during the college years is irrelevant to the original question. The real question is who owns the asset at the time FAFSA is filed. An expected inheritance is still owned by living relative - there are no guarantees that the student will ever get that money, as the estate could be depleted for any number of reasons (and a new will could be written at any time). So who owns the funds associated with the structured settlement?
In the case of someone in a conservatorship, the money is never controlled by the person conserved (“ownership” isn’t a helpful term - it belongs to the conservatorship estate not the conservatee). It is controlled by the conservator.
Think Britney Spears and her dad.
Also, when we are talking about a minor, in a purely legal sense. minors don’t their own money. That’s why UTMA accounts exist. Once the child comes of age, it becomes theirs. As most people applying for financial aid will be 18+ when they go to college, it is moot who owns the funds earlier.
I an simplifying all of this, but terms like “available”, etc are loaded, precise legal terms. In the disability benefits context, Available means the person can access it any time for whatever they want. If they can’t, then the asset isn’t counted as an asset. Distributions with no strings attached are available. The principal sitting in an annuity isn’t. The former is counted, the latter isn’t. FA probably uses a similar concept, which is also why retirement accounts are excluded.
I am no financial aid expert, and schools each have their own rules. Availability is not the concept that applies, and of course schools do it differently- most obviously they consider parental assets.
I don’t know how SNTs or ABLE accounts (love ABLE accounts!) are treated for financial aid as opposed to benefits, but as a parent’s trust account is counted for financial aid, makes sense an SNT (also usually a parent’s) would be, too. An SNT, by its terms, can be used for education.
To answer your question- the annuity contract states who owns the money. Gotta know what is in the contract to know who owns it.
I disagree. Minors can own assets; the legal question is at what point do minors have control of the assets and who is in control until that point. The “TM” in UTMA is “Transfer to Minors.” Funds held under a UTMA are the legal property of the minor (earnings are taxable income to the minor), but are controlled, typically by a custodian or conservator, who acts as a fiduciary for the benefit of the minor until the minor reaches the age of majority and can legally assume control of the assets. If funds in a UTMA are not the legal property of the minor, then who is the legal owner of the funds until the child reaches the age of majority?
But ownership isn’t the only determining factor. Assets in a trust are owned by the trustee, yet beneficiaries must list their anticipated asset value on the FAFSA, even if the funds are not distributed or accessible in any way until years after college is completed.