"Well off" Uncle helping pay.

Paying for College
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<p>Actually, in 2013 the annual gift tax exclusion is $14,000 per year per person, and above that each person has a total $5.25 million exclusion from gift/estate taxes. It would be very easy to set up a loan structure as mentioned above without impacting anyone’s gift tax or income taxes. You can also leverage the annual debt forgiveness amounts by 2x-4x if uncle is married and you are includedin the loan/gift program.</p>

<p>Also, a zero interest loan creates a gift, or phantom income to uncle, in the amount of the interest that should have been charged per the IRS’ APR minimum interest rate.</p>

<p>If the promissory note will be cancelled upon the uncle’s death, it will need a higher interest rate than the minimum APR.</p>

<p>OP, please do not take random posters’ tax advice, always check with a professional. If your uncle has enough money to pay these amounts, I am sure he has a competent accountant or attorney</p>

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<p>"OP, please do not take random posters’ tax advice, always check with a professional. If your uncle has enough money to pay these amounts, I am sure he has a competent accountant or attorney "</p>

<p>This above all. Though it is MY opinion that the gift tax is not likely to be an issue, and that the interest can be set a certain way, and should be done this way or the other, I’m just a parent, not a CPA, nor do I have an inkling of your uncle’s situation, or what current laws about all of this are, for sure. I’m just spouting out ideas. I can tell you that loans are not included as income, nor do they have to be mentioned on FAFSA, but if someone pays your tuition directly or gives you money, you do have to report it, and you can look at the FAFSA instructions to see that clearly yourself. And if they go on there as they should, yes, they would be counted as income. So the loan for the next three years is the way to go, but how it should be structured and handled is not something I have any expertise about, nor should you trust anyone with advice on this. It all has to be verified.</p>

<p>One tip, do not fill out subsequent years’ FAFSAs on the day you have a lot of money sitting in your accounts because you will get hit with a % of assets towarrds your EFC. Plan to fill out that FAFSA on a day that the loan proceeds are NOT in your hands or accounts. In that sense, a lump payment of all the years or for the whole year, may not be wise. You should be on empty the day you complete FAFSA.</p>

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<p>When I read the opening post it appears to me that the uncle will be loaning the fianc</p>

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<p>Alright to answer a few questions the program is 28 months straight without breaks. She will be receiving 20k in FAFSA loans per year at a maximum. She will need an additional 40k to pay the remaining tuition and living expenses. </p>

<p>Her Uncle will be getting paid back 6 months after she graduates at a rate of around 10-15% of her income post graduation. </p>

<p>The reason we want to go through her Uncle for the money is because no matter what loans interest rate it will be lower than any banks.</p>

<p>Sorry for the delayed responses.</p>

25

<p>Well, if she is going to return the money anyways, for goodness sakes what is the big deal about putting in on paper as to what the terms are going to be? It should be made official, and if she is depending on the money for 28 months straight, it might be a good idea to have it set up so that it is available if something happens to Uncle. Like if he becomes disabled or dies. If he gives out the whole amount, you have to report it on the day you fill out the FAFSA. Perhaps a parent can hold onto that money if it makes it easier to borrow in a lump sum. For administrative and paper work purposes, the lump sum would be easier. But you do run into the problem of 20% of your/your wife’s assets being directly applied to EFC, so having money sitting there on the day you fill out FAFSA is not a good idea. </p>

<p>So, yes, the loan should be documented with all contingencies addressed, like what happens if anything happens to Uncle, your wife, terms of repayment, etc so that there are no misunderstandings. And yes, your Uncle’s CPA should be involved in this.</p>

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<p>Wish I would have read this stuff back in 2007 when I did it for my nephew.</p>

<p>… and I DID have professional advice… from my accountant on Long Island! I think we have something to talk about. :-\ …like first thing tomorrow morning!</p>

<p>The thing is set up as zero interest and on-demand. Just looked it up and both are bad.</p>

<p>“Lucy! You have some ‘splainin’ to do!”</p>

<p>Until now, I was sure we were good… with regards to IRS. Jesus H. Christ, you can’t trust anyone to be competent anymore!</p>

<p>This is still in play. I’m still “gifting” it to my nephew annually from that agreement.</p>

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<p>Ok, so I’m relatively new at this FA stuff (D1 is a rising HS senior) and trying to understand it. Let’s assume a hypothetical situation where college COA is $50,000, determines an EFC of $30,000, and makes a $20,000 grant. Are you guys saying it matters where the $30,000 comes from? For example, let’s say grandparents agree with parents to split the $30,000 50/50 and grandparents pay their share of tuition directly to the school in order to qualify for the unlimited gift tax exclusion on direct tuition payments. Are you saying that this will affect the EFC? What if instead the GP’s gift the $15,000 to the parents, who turn around and use that money to pay the $30,000 tuition? Are you saying that parents would have to report the $15,000 as “income” on FAFSA? (It’s not income, it’s a gift!) Why should it matter how the family decides to come up with the $30,000?</p>

<p>By the way, confirming that the regular annual gift tax exclusion is $14,000 per year for 2013. If uncle is married, they can double that to $28,000 per year. Tuition payments above that are also excluded if paid directly to the institution, but not if reimbursed to the student. Also beware these schemes to make a “loan” and then forgive it later as a gift in $14,000 increments. If that is a prearranged plan (wink wink), then the IRS could re-characterize it as a gift because it was always intended to be a gift, although it is unlikely to be caught since there is little incentive for IRS to audit small gifts. Also, lifetime exemption is $5.25 million for 2013. If uncle is married, that can be doubled to $10.5 million.</p>

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<p>FIrst of all, this is not a dependent student situation, so any gifts given to the couple are reportable as they are to a dependent student. For dependent students, on FAFSA, gifts to the parents are not reportable, so Grandpa can give the parents the money and they can then use it for the kids. For independent students, that is not the case. Monetary gifts are reportable, so if mom and dad, as well as grandpa or uncle pay for an independent kid, that is reportable, </p>

<p>Having worked with IRS audits, if you document a loan properly, what you do later with it , is no issue. You can’t just wink, wink and do a half a job in documenting the thing if you want to pass muster on an audit.</p>

<p>Also, the chances of a FAFA audit are very small, so all of this is probably not necessary. There are a lot of people out there having any given person paying whatever for college and not reporting any of it, and they all live happily ever after. But there is a RIGHT way prescribed, and IF you are the lucky duck selected for a thorough audit, you want to be able to have the papers right there, and get through the danged thing in no time, with no questions, because if you get someone looking for trouble, you can get it if you have been wink, winking your way through the process. </p>

<p>The other thing is that schools that use PROFILE want to know of ANY money given to the parents, and some schools that use FAFSA only also can ask additional questions when it comes to their own funds, anytime they so please. And a lot of times, you don’t know until you are asked a question directly, like “has anyone given you any money as gift or paid your tuition/college cost?” You can lie, yes, you can always lie, and hope you don’t get caught. Money has been getting tighter, and schools are pulling the nets tighter as a result about their own money. They are looking for every little bit.</p>

<p>In the case. of the OP, she is borrowing the money, in fact. So there is no “wink, wink” about it. By setting up a bonafide loan agreement, she and uncle are rock solid and clean as whistle regardless of any audit. This is all above board. And any loan document can be so structured. If uncle or whoever lending the money chooses to forgive the loan IN THE FUTURE, that is up to the lender. There is a risk to the borrower, that if s/he is taking this money on the understanding that it is going to be forgiven, that if the lender decides NOT to forgive it, the borrower is legally going to owe the money. So it’s not a risk free transaction here. Do not misunderstand. There is no “wink, wink” here in that once the loan documents (and there are criteria that have to be in that document to be a bonafide loan) is signed, the borrower OWES THAT MONEY UNTIL the lender forgives the loan. Get in a fight with uncle or grandpa or they get into difficult financial straits, that money could be an issue because they do not have to forgive the loan despite any verbal assurances that this was going to happen. The signed and notarized documents will have legal precendent on that one. </p>

<p>But for purposes of this thread, the OP’s fiancee is BORROWING the money with every intent to repay it. So no problems here. Loans don’t go on the FAFSA. The loan should be documented for all sorts of reasons, not the least being to prevent any future misunderstandings. No problem here at all. No gift tax issues since it 's going to be repayed, not a gift.</p>

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<p>“Having worked with IRS audits, if you document a loan properly, what you do later with it , is no issue. You can’t just wink, wink and do a half a job in documenting the thing if you want to pass muster on an audit.”</p>

<p>cptofthehouse: I respect your opinion, but the fact of the matter is that if the loan docs are just window dressing and there was never any intent to enforce them, then it is IN REALITY a gift from the inception and not a loan at all. For gift tax purposes, the subjective intent of the donor matters. However, as I noted earlier, it is highly unlikely that this would be caught on audit.</p>

<p>Also, I did not read OP"s post as saying that it was clearly a loan with full intent to repay. I read the post as asking about the best way to structure, as gift, loan, or whatever. In this regard, since it is an independent student situation, sounds like the loan is the way to go, unless uncle is rich enough and willing to pay for his niece’s education in full and take the couple out of the FA world entirely. If niece is an intended beneficiary of uncle’s estate anyway, his estate plan could be drafted to treat his tuition payments as advances against niece’s future inheritance. (If niece were the sole beneficiary of uncle’s estate, it wouldn’t matter.) This would be especially advantageous if uncle has a taxable estate (greater than the $5.25 million lifetime exemption) because the tuition payments would be exempt from gift tax if paid directly to the institution and would reduce the size of uncle’s estate dollar for dollar. At the current estate tax rate of 40%, this would save 40 cents in taxes on every dollar given. In effect, the government would be subsidizing 40% of the tuition payments. For example, if uncle paid $100,000 in tuition, it would actually only be costing him $60,000. (Although uncle would never see those savings, his heirs would.) Uncle should not only consult a CPA, but also his estate attorney, since not all CPAs are conversant in estate and gift tax planning and any modification of uncle’s estate plan would require legal assistance.</p>

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<p>My MIL’s mother “lent” her son money for years, all properly documented, with market rate of interest on the loan, and interest plus a small payment made each year. Due to the nature and the extent of the family business, they were audited a number of times and it was never an issue. My accountant is so conservative, he would love for everyone to pay an extra Whatever each year in taxes, and he has no problems with properly constructed loan. The risk factor of the loan is really the issue. Who on earth is to determine whether someone is like OP’s uncle who is truly lending the money with the full intent of repay vs someone who is not? A repeated pattern over time might so indicate a shame, but really the tax ramifications of all of this is not an issue anyways. I don’t think there s going to be any problems with this loan or any such loans. </p>

<p>Just giving the money is not a tax,estate,gift tax issue so much as it is financial aid one. That is the immediate concern. If you get money from any source, a portion of it is supposed to go towards your college costs. When you apply for financial aid, there is an intense interest in any outside money. But with interest rates as low as they have been, if someone wants to take the risk, they might find it profitable to lend to a relative at say 5% interest which is still better than the DIrect Unusub loan a student can get, as well as PLUS. Doesn’t show up on the credit reports either.</p>