Terminally ill grandparent - advice on terms of will?

Paying for College
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Have a situation that I don’t know how to deal with. It will probably take a consult with a financial planner but, based on the “professional” advice (fail) I got about a small inheritance I got in 2015, I’m thinking the collective knowledge here is better than many professionals.

I have one son, senior in high school. I tried to do all the right things… ran the NPC’s and took the worst-case scenario as an estimate for how much to save/prepare for. A little tricky as I’m divorced, and got a small inheritance and an unexpected promotion in 2015. EFC on FAFSA ended up going up by $6K from the initial estimate but, well, it was due to financial positives, so manageable. We have 2 years worth of the EFC saved and I’m comfortable about being able to pay the rest from my earnings. I also have viable back-up plans, such as a well-funded 401K account that I can borrow against.

All seemed under control but my mother has been diagnosed with terminal cancer and, well, we’re just hoping that she will get to see her grandson enter college. A couple of years ago, when it became clear that my son was going to choose a career in music, we decided that I would take care of his school costs and she would make sure that he would have a nest egg when it came time to buy a house or maybe even save it for his retirement. Now, I’m worried about what an inheritance will do to his financial aid picture. My mother is asking me what, if anything, she can do to protect her original intent as much as possible.

I’m thinking, ultimately, he will lose any financial aid once the inheritance is executed – does it matter if it’s in his name or mine (parent)? He’s applied to mostly expensive privates and conservatories, with COA in the $60-70K range. Our worst-case EFC is $35K, best is $19K. He will likely get decent merit wherever he ends up going, but I’m not expecting that to affect our cost for now (i.e. I think they’ll apply FA after merit), but if will make a difference if he gets zero FA. I will be the executor and am hoping I will be able to move slow enough so that the money transaction happens in 2017. In which case, it would only affect the last two years of school.

It won’t be the end of the world if his inheritance goes toward his college costs, but my mother is so sad that her original plans may not happen. I’m just wondering what the best strategy is going forward. I really appreciate your patience in letting me tell this long story.

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Sorry about the illness in the family. I am not an accountant and you should consult a professional but off the top of my head:

How much is the inheritance if I may ask? Not to intrude but it makes a huge difference. If it is $1M, it may not
matter whose name it is in, there is nothing you can do, if it is 200k it will hurt if it is in your name but only about 12K a year in aid IF IT IS IN YOUR NAME. If it is in his name he will have to pay 40k a year in FA more. Also keep in mind your mom may a lot of expenses as a result of her illness, full time care, funeral etc.

Children’s assets must be spent at a rate of 20%, parents at 5.65% per year for tuition.

After your son graduates you can give him the inheritance at a rate of 14k per year tax free. If he needs a large purchase, you can give him a loan with deferred interest and forgive the loan at a rate of 14k per year (check with an accountant).

Also, what type of inheritance is it? If it is her 401k or IRA it can be transferred to you or your son (not sure about the generation skipping aspect but I think it is fine) and does not COUNT for FA at all. Whoever it is transferred to will have to take annual distributions but if they are to your son it should be minimal since it is based on his lifespan. So in that case he is the better choice. You could split it up, give him the IRA and you take the regular assets.

Do not borrow against your 401k unless YOU (not your son) is prepared to pay it back.

Sell any assets that you plan to while they are in her estate, not when you own them if possible. This way no unexpected income is generated to you.

Some schools ask if you are the beneficiary of an estate or trust, others do not so go back over your CSS answers and see which do that. Also, some schools that have their own Profile are actually kinder in the questions they ask than the CSS, so ask to see theirs for the future.

Run the NPCs with the new asset numbers with each of you and your son owning the assets and see where it comes out. Yes not rushing to settle the estate is a good idea but since it is within your control only gets you so far, especially if the school asks if you or he is a beneficiary.

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@SeekingPam, I don’t know why it didn’t occur to me to run the NPC’s with estimated numbers. What a “duh” moment! I’ll probably wait a few weeks until school choice and numbers are more definite. Whatever the implications of all this, it’s not going to affect my son’s school choice. That’s a done deal.

I don’t know the total value but her house is paid for, and I know that when she was diagnosed, she liquidated some things to have cash on hand for her expenses. My father passed away only a little over a year ago, so she’s well aware of the cost of end-of-life care. I know there are various IRA’s in addition. I expect that the number will fall somewhere in between the two figures you mentioned.

I appreciate your feedback. Giving him the IRA’s is a good idea. (In the end, it will all go to him anyway – I’m an only child and he’s my only child.) Thanks for the asset %'s used to compute contributions; I didn’t know there was such a big difference.

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Go see a financial planner. They may be able to set up a trust for your benefit for X years, then to him.

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@HRSMom, my parents considered trusts when they drew up their wills and were advised that the benefit might be minimal for our family’s situation. Trusts aren’t cheap to set up but they ensure that specific wishes are carried out. That’s not an issue for us since everything’s going to end up with my son anyway. (We’re both only children.)

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Definitely keep inheritance in your name. Also make sure you are maximizing funding your retirement. Sorry about your mom.

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Seeking Pam gives you excellent advice but I want to correct one thing that might not be clear from her post- there are no “do-overs” when it comes to an inherited IRA. Your mom needs to make sure now, while she is alive and well, that her IRA is titled correctly with the appropriate beneficiary (her lawyer can run two scenarios for her- one with you as the beneficiary and what your payout schedule looks like for the rest of YOUR actuarial life, and one with your son as the beneficiary-- he’s younger, so he’ll be required to take out much smaller amounts annually than you will.)

After your mom passes (and so sorry to be dealing with such trivial matters as her money when she’s facing a catastrophic illness) again, the IRA needs to be re-titled correctly in order for you to preserve the maximum tax benefit.

There are no do-overs- once the accounts are retitled, the IRS is not inclined to reconsider if you’ve screwed up (and thousands of heirs screw this up every year. All they know is that they have an IRA and are not required to take annual distributions so what’s another retirement account? Not knowing that if you inherit a retirement account, your required distribution begins in the tax year which you inherit it.)

A final clarification- you (and your mom) can give any amount of money you want to any person and for any reason. The 14K limit is what you can give a single person in a single tax year without having to file a gift tax return… and most of the time, there is zero tax required when you file that return. If your mom’s total estate is in the neighborhood of 1 million dollars? you shouldn’t worry about the gift tax. Sure, it’s convenient to give away 14K and not have another piece of paper to file in April. But the form takes ten minutes… and if there are reasons to accelerate gifting then you should do that.

Again- talk to the lawyer who set up the will.

You may also need to check on the estate taxes in the state where your mom is domiciled. Folks often forget that just because the Federal estate taxes have a high threshold right now, there are some states where the taxes hit even very small estates. And again- your mom owes property taxes, grand list (if your state has a personal property tax), some transfer tax on the sale of the home- all of which will start to whittle down the proceeds.

Big hug as you deal with this-- and so sad for all of you.

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Yes @blossom is correct. It is absolutely important to take distributions, the penalty is high if you do not starting from the first year. Not to sound harsh, but consider if she should take the RMD on all her IRAs now (most people who are not living on them schedule them for the second half of the year) so it will be her income and not yours or your son’s if FA is your main concern.

I forgot about the estate taxes. They really vary from nothing to a decent percentage. Also in what is considered part of the estate, how probate works. The IRA (most likely) will still be considered part of the estate for valuing it for state tax even though if it is titled properly it should be outside of probate. I am sorry about the loss of your father. One thing, it is a little complicated to transfer assets and deal with the estate when it is a parent rather than from one spouse to the surviving spouse. Most spouse assets are titled with right of survivorship so this transfers automatically.To the extent possible try to title assets so that they transfer to the intended beneficiary outside of probate. For example Transfer on Death bank and stock accounts (I know this speeds things up for you for FA but really makes it less complicated, this is where professional advice can help weigh your options as to the better alternative).

Some states have no gift taxes, others do. If you are above the threshold for state estate tax she may or may not be able to gift you or your son some of the excess non retirement assets NOW to bring the size of the estate down (assuming that is an issue in your state). You can then spend down some of those assets, maybe into a Roth IRA, if you hurry for last year and this current year (which is excluded from assets and is also not added back into your income the way a 401k contribution would be).

Not sure if the gift or inheritance itself triggers anything on the FAFSA or CSS for next year? Anyone?

While it may not influence his choice of college, there are enough similar schools that treat certain items differently that it is better to do the math now and nudge him if possible.

To give the mundane example, for a family making 60k, each of the HYPS would cost very different amounts. I think in your op you indicated your COA was very different. Over time that adds up.

Some of the books I have read discourage trusts, there is a Princeton Review on How to Pay for College. Something about the perception that the whole amount is available when it is not.

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I know we have had discussions out here about whether receipt of an inheritance (the actual distribution) should be reported as income or asset. It seems unfair to treat it as both, but I don’t recall the upshot of the discussion. Timing of the distribution is slightly adjustable, depending on who the estate executor is. If they are distributing near a year end, for example, they maybe able to delay distribution until January.

I hesitate to bring it up, but if a trust is set up so distribution to the beneficiary is restricted to some future date (say, age 30), some colleges will not treat that trust as an asset. I know because my kids have (not very large) testementary trusts from my brother’s death that aren’t available to them until age 25. And while we reported the trusts to the colleges, at least one college does not consider that a available asset and gave my kid more FA when we explained the restriction on the trust. But I don’t think all colleges would treat it that way. Maybe others have experienced with this that differ.

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The older threads generally agreed an inheritance is assets, IF one doesn’t properly shelter the money.

When using a financial planner and concerned about how all this affects college, you have to find one who is versed in college financial realities. Many just are not.

Same goes for having the atty revisit the will. Make sure he or she understands the implications for college funding.

And if she gifts the money now, you end up with the same assets on hand issue- now in his name at the higher college contribution rate. Maybe she gifts to OP.

Also, right, whether or not a trust is considered depends on the college (tho I know of no anecdotes before yours, intparent, where it was ignored.) Like home value, even when a trust is restricted, it’s considered tappable. This is discussed on one of the financial aid sites.

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Thanks for all the help, all of you. Even if I do go seek professional advice, I know from experience that it really helps to know just enough to ask annoying questions. :slight_smile:

Ironically enough, my mother and I learned some financial lessons after my father’s death. So, at least we’ve gone from having had to hunt through his computer and piles of paper statements to me being either the beneficiary or co-owner of most accounts, and at the very least having all the account numbers, log-ons, etc. I did inherit a Roth IRA from my father in 2015 that I took the distribution on to pay for all the audition trips and I did have to report it on the CSS Profile.

I have a pretty good idea how my son has his schools ranked. I suppose I could point out that going to school X will mean more inheritance left but, in all honesty, I know he won’t care. And that’s fine. He’s going for jazz studies, which are usually small programs and very different from school to school, teacher to teacher. He applied to and auditioned at only 6 schools, so it’s not as if there are a bunch of similar programs. Anyway, that part will play out soon enough!

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This is not correct. As you mention, a student inheriting an IRA will have to take Required Minimum Distributions, which will indeed count as student income for FAFSA purposes. Also, the year-end value of an inherited IRA or similar qualified retirement plan needs to be reported as a student asset on Profile (question SA-105).

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Even on a 150,000 IRA, the amount distributed for an 18 year old would probably be less than $1000 (guessing her e although there are tables to look this up) of which he would have to pay about $450 in financial aid and income taxes (assuming he had other income to put him over the threshold). As opposed to the average 50 year old would get a distribution of about $5000 on which she would pay at least $1000 in income taxes (assuming a 20% bracket which is low) and then another $800 in additional FA lost.

You are correct that the Profile asks about IRAs for both parent and student but I thought they were not considered available assets. So far at least not for the parent, not as sure about the student IRA. Also certain very generous full needs schools that have their own forms do not ask about IRAs at all, although that is unusual.

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@lookingforward, the info about the trust came up when I asked for a FA review – my kid had been accepted to s higher ranked college with a COA of about $10,000 less. They asked if there was ANYTHING about our finances we hadn’t shared that might affect the FA, and I brought up this restriction on the trust. They pounced on it, and improved her FA. Sort of felt like they were looking g for a reason to match the other FA without admitting it… so it may not work in other situations to have that type of trust. The trust was also set up several years earlier by my brother’s will – maybe seemed less like an attempt to shield money than a more recent grandparent death might?

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You are making the assumption that the distributions from the inherited IRA will be made in equal installments over the projected lifespan of the student who inherited, which is a mistake. While this is an option, certainly some (probably many, maybe most) who inherit an IRA will choose to take distributions in a different way, up to and including a lump sum distribution, to pay for expenses associated with young adulthood.

It depends on the institutional FA policies of each school.

Besides Princeton and U Chicago, what schools would this be? Princeton asks for information on parent retirement assets.

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@BelknapPoint I said it was unusual about the schools, I did not know which I just knew a couple did not.

Most NPCs even on the student calculation ask you to exclude retirement accounts from assets. So since the NPC is supposed to be representative of your EFC and the colleges are required to make an effort to have it be this way, if the NPC specifically excludes retirement accounts from most Profile schools (have not done a school by school analysis-are there any where it doesn’t?) then they cannot include them as available assets when doing the FA or the numbers would be screwed up and in situations where there are substantial retirement assets, NPC would show an inaccurately low EFC leading to claims of bait and switch. Also might lead to claims of age discrimination since of necessity a 60 year old who delayed children will have more retirement assets than a 45 year old one would hope.

The OP started from the premise that neither she nor her S wanted the money in the near future, rather the goal was to preserve the inheritance. At least for the first few years mom will be in control of the IRA even if the kid is 19 (unless he is a different type of kid than what OP suggests). Since the family knows he needs to minimize income to preserve his inheritance, while the kid is in school he will take annual distributions based on life span unless a financial adviser suggests otherwise, which is possible since we do not know OP or the facts beyond what she has laid out and I am not a financial person in any case. After he gets out it may make sense if he is starting a business or supporting himself while trying to break into music to take larger distributions. Since he will have very little income in those scenarios it is not the worse idea in the world, again will depend on the facts then and the financial advise then

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Ok then, which couple very generous full needs schools do not ask about IRAs at all?

Indeed.

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The question about retirement funds funds is a standard CSS bullet, not one of the extras colleges might add. They ask in order to see your basic financial stability. That’s explained somewhere, by CB. In the Fafsa at least, there is some allowance for an older age. An older parent has fewer earning years, in theory.

This is interesting https://www.khanacademy.org/college-admissions/paying-for-college/financial-aid-process/a/css-profile-walkthrough If you go to the second video, at about 1:57, the Stanford FA Director explains how they look at retirement assets.

On that note, what’s not looked at are funds in a “qualified retirement plan” (QP) and those are usually locked in, pre-tax.

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Let’s not lose sight of the fact that while it would be a shame for the grandparents wishes not to be fulfilled… if we are talking about the FA implications of inheriting an IRA, we ARE talking about money which was earned by the grandparent, was shielded from any tax payment by putting it in the IRA, and has presumably grown via capital gains and dividends tax free up until now.

So the reality that the kid will- at some point- have to pay taxes on this money which has been sheltered for X years… is not the most devastating part of this story. We do not have a confiscatory tax system whereby the kid loses 100% of what he has inherited to taxes when he takes his RMD… he’s just paying taxes on dough which was earned income to his grandparent which has not yet been taxed.

Just to clarify…

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@lookingforward very interesting video, thanks.