Q. If a recently orphaned college student has no direct access to an estate account or a trust fund in her name until she is 25, does she have to report that as savings or net worth to FAFSA? She will be 21 when she graduates. What about Inherited IRA accounts?
— Trying to help
A. Financial aid calculations can be complicated.
A trust is indeed considered an asset of the beneficiary and must be reported as such on the Free Application for Federal Student Aid (FAFSA) even if access is restricted.
The only exception is if the restrictions on the trust fund are involuntary, said Lisa McKnight a certified financial planner with Lassus Wherley in New Providence.
An example would be if trust was established by a court to pay future medical expenses for an accident victim or if ownership of the trust is in dispute, she said.
Unfortunately, the restrictions often prevent the beneficiary from accessing or liquidating the trust to pay for college, so the trust fund will reduce the student’s eligibility for need-based financial aid year after year, McKnight said.
“An asset in the student’s name will reduce eligibility for need-based aid by 20 percent of the value of the trust,” McKnight said. “Moreover, since the beneficiary cannot liquidate the trust, the trust will continue in existence, affecting eligibility for need-based aid every year.”
But it’s possible the trust is not as restricted as you may believe.
McKnight said it’s important to carefully read the trust document and discern if there are provisions that allow the trustee to withdraw money for the benefit of the beneficiary for health, education, maintenance and support. If distributions are possible, then the distribution will need to be declared as income on FAFSA, while the remaining trust balance should be reported as an asset, she said.
Most trust funds are not effective means of sheltering money from the financial aid process, she said.
“After all, if you could shelter money from need analysis simply by placing restrictions on access to the money, the need analysis process becomes ineffective at assessing ability to pay,” McKnight said. “A trust is still a source of financial strength, regardless of whether access to the trust is restricted or not.”
Also, you mentioned inheriting assets from an estate outside of the trust. Inherited assets are counted as assets and part of your net worth on the FAFSA.
A sizable inheritance can could mean a sizable loss of financial aid, McKnight said.
“An exception is retirement type of accounts such as IRAs and Inherited IRAs which are not disclosed on the FAFSA,” she said. “Keep in mind that any distribution from the Inherited IRA is counted as taxable income on your tax return and FAFSA.”
Although reporting the trust and inherited assets may cause the student to lose some federal aid, it is important to realize that there are a variety of scholarships for orphans, which can be found by searching the www.Fastweb.com scholarship database, McKnight said.
Additionally, as an independent student with low income, the student may qualify to use the Simplified Needs Test to calculate the Expected Family Contribution (EFC), she said.
“This method ignores assets and thereby increases eligibility for financial aid,” she said. “Tax management will become very important so that you can qualify for the American Opportunity Tax Credit as well as the Simplified Needs Test.”
The student should also talk to financial aid officers at the college. They may have some resources for her.
There are many moving parts here and areas that can be controlled in order to lower the EFC and help qualification for additional tax credits, McKnight said, so it may be advantageous to consult with a certified financial planner or a certified college planner.
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