<p>I will rely heavily on financial aid in order to pay for school. My great uncle left me stocks which currently hold a value of $50,000+. When applying for financial aid, will these hurt me? Is there anything I can do to hide this? (Legally, of course)</p>
<p>First of all, condolences on the death of your great uncle.</p>
<p>Do you live in a state that requires you to pay inheritance taxes? For 2010 they are Indiana, Iowa, Kansas, Kentucky, Maryland, Nebraska, New Jersey, Oregon, Pennsylvania and Tennessee. These states require that the individual who receives the inheritance file and pay any taxes due on the money or property they inherited. If you need to pay an inheritance tax, that should come out of your total. </p>
<p>Second, did your great uncle pass away in 2010 or 2011? It makes a big difference. Due to the failure of Congress to plug the 2010 estate tax loophole, anything you inherit in 2010 will be at the cost basis of the original price paid for that asset. So if you inherited stock in IBM in 2010 that was worth $50,000 at the time you inherited it, but your great uncle bought it many years ago at $5,000, you’ll owe capital gains taxes on the difference between the original cost and its inherited value. If your uncle passed away in 2011, then you inherit the stock at its current value and do not owe taxes on the gain.</p>
<p>Outside of the tax complications, if you now have $50,000 in a brokerage account in your name, you must report this on your financial aid forms (FAFSA and Profile). This dollar amount will increase your expected family contribution (EFC) by 20%, or $10,000. </p>
<p>Can you use this money to help pay for college? If so, then you might want to consider moving it to a 529 account. It will grow tax-free in the 529 account, and will not have as large an impact on your EFC - only 5.6% rather than 20% will be added to your EFC every year. In order to move the money from a stock account to a 529, you’ll need to sell the stock as the transfer can only be done in cash.</p>
<p>Some of the info in the foregoing post is incorrect.</p>
<p>For estates of people dying in 2010, there is a step up basis of up to $1.3 million in assets for non-spouses. Also, under the new tax act, the estates of 2010 decedents can be taxed under the 2011 rules, which allows a full step up of all assets. This means that you can use date of death value for the stock, not the original cost basis.</p>
<p>Also, there would be no capital gains tax until the stock is sold. The death does not trigger capital gains tax. </p>
<p>If in doubt about these tax issues, please talk to an accountant or tax attorney.</p>
<p>Hope this helps.</p>
<p>I left out the fact that if the (2010) inheritance falls under the $1.3 million limit then the step-up basis is used. I was assuming the estate was > $1.3 million, but this may not be the case. </p>
<p>Sorry if I’ve misread the implications of the new tax rules. I wasn’t aware that the new tax act retroactively allows 2010 estates to be taxed under the 2011 rules.</p>
<p>I don’t believe it does. I think there was zero estate tax in 2010.</p>
<p>There was zero federal estate tax in 2010, but the cost basis of what was inherited is a separate issue. Prior to 2010, the cost basis of the inherited assets was the fair market value of that asset as of the day of death (or 6 months after). The asset is inherited with a “stepped up” cost basis. That way no one had to worry about what the original cost of the asset was, whether it was a house, a stock that had split multiple times with dividends reinvested, gold coins, etc. But in 2010 the original rules were that after the first $1.3 million, any inherited asset was inherited without the step-up in basis.</p>
<p>While the estate would avoid all federal estate taxes, the possibility of capital gains taxes would be significant.</p>
<p>Now it seems that the new rules allow for all assets inherited in 2010 to be valued at the stepped up basis.</p>
<p>The actual details were that my great uncle gave an amount of stocks to all of the grandchildren in my family before his death. (So I wouldn’t consider it inheritance and I haven’t payed any inheritance taxes on it.)</p>
<p>This question was more aimed at how I should handle the stocks when approaching financial aid. I do intend to use most of it to pay for college, but I know that the stocks alone will not be enough to cover the expenses of 4 years of undergraduate study (not to mention graduate school after that). Will these stocks drastically reduce the amount of aid I can get or make me ineligible?</p>
<p>$50,000 in stocks in your name will add $10,000 to your EFC. $50,000 in a 529 account will add $2800 to your EFC. The net difference is $7200. If your stocks return 14.5% per year, there’s your $7200. If your uncle gave you Apple stock in January 2010, you would have gained about 60% last year (just for comparison). </p>
<p>If you need the money to pay for college, you should invest it conservatively. Most 529s have age-based funds where assets are allocated among a variety of financial instruments, ranging from very conservative to more aggressive, depending on how soon you’ll need the money. So a 529 account might have 20% in stock and the rest in bonds and money market funds. You can’t choose what the 529 invests in; the fund managers do that for you. The only thing you can choose is the relative asset allocation. </p>
<p>Is there someone in your family who can help you decide on how to best invest your money?</p>
<p>Hey everyone…take a step back on making a short-term investment in the stock market to pay for college. Stocks are for long-term investing and as you approach college, like it or not, you’ve got to be looking at capital preservation. Laddered CD’s are a safe option. </p>
<p>The previous post mentioned a 14.5% rate of return…let me know how you get that in the short-term without hanging out on a limb. Banking on dividends should only be part of the plan. The last 18-months are a good lesson in how fast a college savings account can disappear. There’s nothing magical about a 529 other than the tax exempt treatment, otherwise it’s subject to the whims of the market like an investment.</p>
<p>Like the previous post said, look at the asset allocation of any 529 and you’ll see how the latter years of a 529 go almost liquid. You do need to talk to someone like a fee-only CFP, not a bank, to get some advice.</p>