<p>We can’t really judge her or tell her how to live her life…many people don’t earn close to their “potential” and that certainly doesn’t make them terrrible parents. I think that’s especially true of the artists among us - who knows when their talents will be recognized? </p>
<p>Before she makes these decisions, she really needs to know if she’ll be qualified for the simplified needs test. Has she determined that yet? Will she sign her son up for free/reduced lunches if eligible?</p>
<p>Does she need assistance paying living expenses for the child and has she investigated other means of support to do that? If she’s amassing credit card debt to buy food and clothing for him, that’s a bad idea and that bubble may burst before he goes to college. That is a more immediate problem, imo.</p>
<p>The question of saving for college really depends on the boy’s college choices. It could hurt him if the trust stays in his name and he loses all chance at grants, but it would also be a big help if he’s gapped. He’s a little young to make decisions about his future, so perhaps she should just take care of the present and investigate the move to a 529 in her name.</p>
<p>We have just begun to broach these issues, so this whole discussion has been hugely informative and useful. Also gives me an excuse to stay on CC even as the nest empties in August. I believe she is getting assistance of some kind (lives in Oregon) so should qualify for simplified needs test. She sure as hell does not exceed the income threshold.</p>
If your nephew will be starting college in fall of 2012 (applying for financial aid for 2012-2013 year), then your sister’s 2011 will be the “base” year for financial aid. Money she bring in during 2010 will not be counted, so it would be in her interest to either get paid by the end of 2010, or defer income from 2010 into the year 2011. With the latter choice, the money would then get counted for the subsequent year of financial aid, but at least at that point the student knows what college he is attending and has a better grasp on financial aid policies.</p>
<p>It doesn’t sound like your sister makes enough money that it would be significant, however. If her typical annual income is $20K and one year she does very well and earns $35K… she still is on the lower end of the income spectrum and would not be expected to contribute much. </p>
<p>The problem would be if there was a larger windfall – lets say that typically she earns $20K annually and one year she gets lucky and pulls in $80K – that is where the financial aid gets thrown out of whack. </p>
<p>But let me put it another way:</p>
<p>Right now you have a known and an unknown. The known is that there is $35K in a trust fund. IF that money is invested in a low-risk investment, such as in bonds (which can be done in a 529) account, it is sure to be worth more than $35K in several years. For example, at 3% interest compounded quarterly, it would be worth $38K in 3 years. </p>
<p>The unknown is where your nephew will want to go to college and what it will cost, and whether or not the college he chooses will give him a significant amount of need-based aid. He may opt for community college or an in-state public – and the economy being what it is, need-based grant money may be harder to come by a few years down the line. Or, he may do very well in school but earn merit money and not need to rely on a need-based award. </p>
<p>That’s why it’s a “bird in hand” situation and it would be nuts to touch that trust money at this point. </p>
<p>As for both your nephew and your sister: the bottom line is that it is ALWAYS better to focus on increasing personal “wealth” rather than focus on increasing eligibility for financial aid. (I put “wealth” in quotes because if your sister can start earning $30K a year and manage to pay off some of her debt, she won’t be rich – but my point is that she will be better off in the long run). Need based financial aid is a big “maybe” – but it NEVER compensates fully for the value of lost dollars. That is, on paper, your sister would have to spend $5 of trust money for every $1 of decreased EFC for your nephew – what would your nephew have to show for all of that? Does it make sense to spend $20K hoping that several years down the line, a college might then offer the student an additional $4000 in grant money? (To me, by that math, the family has lost $16K, not “gained” $4K)</p>
<p>So really, its a matter of common sense. The more CASH that is available to your nephew in a way that is within the CONTROL of the family, the better.</p>
<p>OP - Regarding the lump sum payments that could spike her income at an inopportune FA time (and yet not be sufficient to maintain the contributon…) Has your sister set up some kind of incorporation of her business as an artist? Or would that be too expensive and would she be unlikely to manage the paperwork/remittances etc.? Just a thought. If she were paying herself a fixed salary, and then ensuring the balance of pretax money were funding future salary, cost of goods/material, etc., it seems like she would have more control to accurately reflect her status. When you are a small business, your business equity is only considered under certain circumstances (eg +100 employees) on FAFSA. Sometimes under CSS form they may request a corp tax return and share/ownership/valuation info. This might all be overkill, but in an artist’s life, you never know when that $100,000 k + commission might turn up…and it can skew things a great deal.</p>
<p>On the matter of the trust, I didn’t see anyone ask what the originators of the trust would want. If your parents are alive, has there been a conversation? If not, was a will explicit about what was important to them? Indeed, it needs to be protected in a way to optimize the benefit for the child. Beyond that, it’s really about determining and meeting what the giver of the gift intended, to my mind.
Best wishes,
K</p>
<p>KM - great idea re incorporation - if only she ever made enough for that to be useful. </p>
<p>Re the trust, parents are alive. While never explicit, its always been presumed that the trust is for college, and, as noted, it has been and will stay dedicated to that (altho I will help Sis explore a wealth-conserving 529 option).</p>
<p>Hey, DRB, I’m from Michigan and they’re having a rather odd “public” art competition here this fall…send your sister the link and maybe she’ll get lucky and win the $250,000 prize…just get her to incorporate first, even as an s-corp : )
Here’s the link:
[ArtPrize</a> - An open art contest based in Grand Rapids Michigan, the world’s largest Art Prize.](<a href=“http://www.artprize.org/]ArtPrize”>http://www.artprize.org/)</p>
<p>P.S. You’re a really great sister <em>or brother</em> (guess I should say sibling), you know!</p>