<p>Playing musical chairs with the kid's assets is NOT. And there is a VERY good reason for it: when you move the cash out of the student's account, it does NOT vanish but takes another form. Pretend that you BORROW the money from your children, and the value of the loan is STILL a student's asset or an investment and IS still reportable. </p>
<p>I have no idea how qualified Taxguy's "lecturer" on financial aid and FAFSA is, but I would not be surprised to see him on one of those late-night infomercials. This is not a question of morality as much of the simplest of accounting. The cash that is accumulated in the student's name cannot be hidden overnight, except through justifiable expenses. Further, for some accounts, it is not even ALLOWED to move assets to the parents for the "switcharoo."</p>
<p>Last but not least, as someone mentioned, the mere change in reporting would not survive the scrutiny of the finaid officers and the verification process. Most students accounts will earn some interest, and this interest WILL have to reconciled with the value of the principal. Having to send in several months of bank statements will uncover the exercise, and the possible referral for further investigation. Not exactly a "trick" for the faintest of taxpayers.</p>
<p>Xiggi notes,"
I have no idea how qualified Taxguy's "lecturer" on financial aid and FAFSA is, but I would not be surprised to see him on one of those late-night infomercials. This is not a question of morality as much of the simplest of accounting. The cash that is accumulated in the student's name cannot be hidden overnight, except through justifiable expenses. Further, for some accounts, it is not even ALLOWED to move assets to the parents for the "switcharoo."</p>
<p>Response: Xiggi, you should know by now that I rarely say anything that hasn't been either researched, reasonably well thought out, or considered by experts. Xiggi, you need to think a bit "outside the box" if you want to be a successful accountant.</p>
<p>I am NOT advocating getting the assets out of the children's name and puting these assets in cash value insurance owned by the parent! As you noted, this has undesirable consequences, the least of which would be potential gift tax implications plus possible fraud.</p>
<p>I was suggesting converting the assets of the children to cash value insurance owned BY THE CHILDREN! It is still their money and their assets. However, for financial aid purposes, these funds don't count as assets. The same can be done for the parent's assets. I should note that I didn't make these rules or create the game. I am just examining how to maximize the rules of the game.</p>
<p>Obviously, you want a low cost policy, and want a good financial planner to evaluate the products to make sure that the cost is very low. There are single premium life products designed for just this purpose.</p>
<p>Itstoomuch for you to understand how UGTM/UTMA works, FAFSA, taxes, and reading my disclaimers?</p>
<p>Like I said before, "carefully, knowledgebly" and "A lack of understanding or A goof, could cost you a lot of $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$".
And more. </p>
<p>for some, it will SAVE them a lot of MONEEEEEY. But probably not you.</p>
<p>It is not possible to transfer money back to the parent from a child's custodial account because the original transfer was an irrevocable gift. Once the money has been given to the child, it is owned by the child. The child does not have the authority to gift the money back to the parent, and the custodian would be violating his or her fiduciary responsibility if he or she transferred the money back into his or her own name or used it for his or her own personal benefit. (If a custodian does this, or otherwise behaves in a fashion that the IRS interprets as indicating that no gift was actually ever made, the custodian would owe back taxes at his or her rate, plus penalties. Also, the child could sue to recover the funds.)
<p>Taxguy, I also try to only speak up after checking my facts. The scenario that entails purchasing assets exempt of FAFSA assessment does indeed pass the smell test, and I have no reservations for such strategy. </p>
<p>My issue was with the part of this discussion:
[quote]
My reading of the FASFA instructions and their rules is that the FASFA must be done truthfully based on THE POINT IN TIME OF THE PREPARATION AND FILING OF THE FASFA. However, based on the FASFA instructions, what I have advocated is perfectly legal. In fact, I specifically asked a lecturer on financial aid if my reading of the FASFA form is correct. They acknowledged that I am right although they too didn't like the suggestion for "moral" reasons.
[/quote]
</p>
<p>If I read your text incorrectly and jumped to an erroneous conclusion, I must apologize. However, I do not believe that the POINT in TIME and the "moral reasons" references were related to the purchase of FAFSA exempt assets, but rather related to the parking of cash outside the student's account for the DAY of the filing of the FAFSA. </p>
<p>From my vantage point, I would be extremely cautious about the mere movement of cash on the date of the filing and extremely worried about the consequences of a rather frivolous action.</p>
<p>Itstoomuch for you to understand how UGTM/UTMA works, FAFSA, taxes, and reading my disclaimers?</p>
<p>Like I said before, "carefully, knowledgebly" and "A lack of understanding or A goof, could cost you a lot of $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$ $$$".
And more. </p>
<p>for some, it will SAVE them a lot of MONEEEEEY. But probably not you."</p>
<p>I'm sorry taxguy. I was a criminal lawyer. I know fraud when I see it. </p>
<p>I don't want to get in an argument on line, but the bottom line you are advising a fraudulent transfer in order to conceal assets, and that is illegal. It is no different than welfare fraud, ethically or legally. </p>
<p>Submitting fraudulent information on the FAFSA is punishable with a $20,000 fine, prison time, or both (per Title IV of the Higher Education Amendments, Sec 490)</p>
<p>For clarification, I (and Xiggi and Emeraldkity) are referring to this statement in your paragraph 6:
[quote]
1. The FASFA is based on a point in time. Thus, the assets in either your or your kids name as of the time you fill out the FASFA is what you put down. The problem is that any assets in the kid's name counts heavily against you in the formula much more than assets in your name. Thus, you cash out all assets in the kids name one day before you fill out the FASFA. You would then send in the form, and give the kid back the money. As far as FASFA is concerned,nothing is in their name as of the date of signing of the FASFA.
<p>I am not sure about the legality of taxguy's tricks, but it certainly sounds like fraud to transfer money out of a kids account on a temporary basis. I always thought accounting was a precise science and Enron was an isolated case of conspiracy and fraud. Recently I got a lesson on the creative nature of accounting. For our business unit, monthly payables and receivables are quite variable. The monthly numbers were being estimated on an "accrual" basis. It appears that the accountants helped out the bottom line by being overly generous in accruing receivables. It appears that this practice occurred for a number of years and the accounting "error" was only discovered a couple of weeks ago during an audit. Our business unit had to make some adjustments in order to achieve profitability. There were some substantial layoffs just before the holiday. Fortunately my job was spared, but I am not too keen on creative accounting.</p>
<p>Taxguy
Could you say more about cash value insurance? Or supply a link?</p>
<p>I wonder about assets in child's names, as I know my S's college wanted to see tax forms (mine & his) for 2 years prior. Other than starting a Roth, or withdrawing a few thousand for computer, etc, its clearly all UTMA</p>
<blockquote>
<ol>
<li>The FASFA is based on a point in time. Thus, the assets in either your or your kids name as of the time you fill out the FASFA is what you put down. The problem is that any assets in the kid's name counts heavily against you in the formula much more than assets in your name. <strong><em>Thus, you cash out all assets in the kids name one day before you fill out the FASFA. You would then send in the form, and give the kid back the money.</em></strong> As far as FASFA is concerned,nothing is in their name as of the date of signing of the FASFA.>></li>
</ol>
</blockquote>
<br>
<p>This is from the original post by Taxguy. It is number 1, except that I added the stars around the sentence that I believe is misadvising folks. It makes it SOUND like Taxguy is advising folks to withdraw money on day 1 and file the FAFSA. The to put the money back into the kid's account on day 2. This is the advice I find questionable. I fully agree that purchasing things the child needs (or even wants) like a computer, car, books, musical instruments, etc, is fully allowable. This is VERY different than transferring funds out one day (so it appears they are not there) and putting them back the next. If I misinterpreted this section of the post, I apologize. Otherwise, I stand by my first statement. It is fraud.</p>
<p>I can't understand why there were 8 posts after I clarified the transfer strategy in post 22. Yes, my earlier post had some strange wording. Mea Culpa! However, I did clear it up in post 22. </p>
<p>The key again is NOT to simply transfer the funds out of the kids name and then back again, although that strategy could work based on the literal wording of the FASFA.The MUCH safer strategy is to transfer the assets out of what they are now into items that are not considered assets for FASFA, such as cash value insurance or insurance annuities. These assets STAY IN THE NAME OF THE OWNER. Can I make this any clearer without having more posts on this?</p>
<p>Bookworm, I really don't want to elaborate on this. If you find this interesting, seek out either a good financial planner or financial aid specialist and copy my post 22.</p>
<p>First, a quick note - we don't offer legal advice in the CC forums, nor should you seek it here. Never rely on forum posts for important legal or financial advice - consult a legal (or financial) professional who can examine your specific circumstances and offer advice that reflects your details and complies with local, state, and federal laws (for U.S. residents).</p>
<p>Second, while properly organizing your assets to maximize aid is an excellent idea, be cautious about dodgy transactions that have no purpose other than to maximize aid. At most expensive colleges, additional information is collected and an aid officer will review FAFSA and other data before establishing the package. Particularly if you appeal the offer, you are depending on the goodwill of the financial aid office. If they think that you are using every trick in the book to make yourself look poor on paper, they are far less likely to be generous.</p>
<p>If you need to do some financial restructuring, get good advice and do it well before senior year in high school.</p>
<p>There is good advice to be mined from this thread. (Also some unfortunate hyperbole, but let's concentrate on the good stuff. LOL. ) Basically the hints fall into two headings: </p>
<p>Remove assets from the child's name in the years preceding the base year</p>
<p>1) Don't shift your kid's money from an UGMA account without a paper-trail showing a legitimate expenditure on the kid.</p>
<p>2) Do this as early as possible to avoid scrutiny or "look-back" (ninth/tenth grade sounds good to me)</p>
<p>And </p>
<p>recognize what children's assets are exempt or partially exempt from the calculation/calculations and plan accordingly (IMO in advance of your base year) by converting counted assets to uncounted assets.</p>
<p>1) the use of insurance products MAY be an appropriate investment for any custodian of funds to make given a particular set of circumstances</p>
<p>But the most important advice? Follow your own compass. If it feels like you are headed down the wrong road, you probably are. Get some appropriate legal/financial advice before you hit the "Bridge Out" sign going a buck-twenty. As always , just my opinion.</p>
<p>DontPanic1: I believe that you must fill out the FAFSA even if your child receives merit scholarships. My D is a National Merit Scholar and we were told by her university to make sure that we did the FAFSA. Because she also receives Bright Futures scholarship money from the state of Florida it was a requirement for us anyway. I think your best bet is to just fill it out.</p>
<p>I know that any planning strikes some of y'all the wrong way. But there are buzz-saws out there that are just waiting to lop off your limbs if you don't know the rules. Ex: (Here's a law school fact situation for ya'll to ponder from real life. Too real. )</p>
<p>I have a close relative, cancer patient, with a very smart 9th grader. Child's birth father not in the picture (by termination of parental rights). Grandpa (knowing the financial stressors) left $40K to kid. </p>
<p>Child was adopted by step-father who then divorced the mother when she got cancer. They had to file for a Chapter 7 bankruptcy. He has nothing to do with the "adopted" child. Throws @$200 a month to them till the child reaches 18. (The number was agreed upon for other considerations) The M+D are struggling mightily (selling jewelry stage) as she works limited shifts due to treatment and the after effects of treatment. </p>
<p>If perchance the child's grades stay high , expensive colleges come into the picture and no planning is done, not only will the $40K be exhausted at the higher kid's rate but the deadbeat "adoptive" father's income will be counted against their EFC. In the worst case scenario, you'll have a kid with $35 thousand dollars worth of income available to her mom, with an EFC of the same amount. With a parent who cannot borrow (either as a practical consideration i.e. dying or general credit-worthiness). Sounds fair. LOL.</p>
<p>Thankfully she has built-in (and aggressively motivated ) legal advice and somebody who spends way too much time on CC. She will spend down those assets or convert them to "uncounted" assets and adoptive daddydeadbeat warbucks will be gone, gone prior to the base year.</p>
<p>I'm sorry if that offends somebody's sense of fair-play. For this college M+D it will be college survival.</p>
<p>If I remember the formula, the FASFA formula uses 5% of the covered assets in your name and 35% of the covered assets in your kid's name in figuring out what you can afford to pay. They also use your income in some way too. Maybe there is someone who is more familiar with this to address this issue with more precision.</p>
<p>For the FAFSA, the Student's Assets have an Assessment Rate of 35%. This assessment on assets is added to the 50% assessment on student's income -minus an Income Protection Allowance of $2550. The total gives the contribution by the student to the EFC, </p>
<p>The Assets of the Parents -after deducting an Education Protection Allowance- are assessed at a rate of 12%. This figure is then added to the AI or Available Income of the parents to create the AAI aka Assets and Available Income. From this figure, there is a gradual assessment with a maximum of 47%. The Income of the parents is also subject to Income Protection and an Employment Allowance before becoming the AI.</p>
<p>It is for this reason that people say that students assets are assessed at 35% but the parents assets have a rate of 47% times 12% or 5.64%. </p>
<p>Please note that schools following the IM or CA methods use different assessments and do not make such difference between students' and parents' income and assets.</p>