I’m new here and I did look for something on this topic but couldn’t quite find it…
My wife and I are middle class with only (significant) retirement savings (1.75 million between the two of us) with the exception of about $125,000 she has with a financial advisor employed by her family. Based on the MyIntuition calculators, it looks like we could get a lot of aid from CSS schools, but now the financial advisor is urging us not just to write a will, which I agree we should, but, along with a lawyer she’s now been meeting with, telling us or at least her to set up a revocable living trust for our only daughter as a secondary beneficiary in the event we both die…
Based on a PDF of an old (2014) CSS form that I found, it looks to me like, if we do this, we’re going to have to put down $2,000,000 in the space under “amount of any trusts for which the student is a beneficiary,” though it looks like we can then specify that none of the money is currently available (assuming one of us is alive to fill out the form)…
Personally, if I were a financial aid officer, I guess I’d look differently at a kid with $2 million in that box than $0, so it kind of feels like unnecessarily converting uncounted retirement assets into non-retirement assets for little reason, but the financial advisor and the lawyer are assuring my wife that it won’t be a problem and that it’ll be much better for our daughter’s eventual guardian to set up the trust in the (extremely unlikely) event we do both die…
Thanks so much in advance for any advice you can provide!
Perhaps @BelknapPoint can answer your revocable trust question. We dealt almost with a trust, and we were told that our share of the value of an irrevocable trust was an asset for financial aid purposes. But I think a lot depends on the structure of the trust.
Re what I quoted. Do NOT use MyIntuition NPC for your best estimate of net costs. Use the NPCs on the college websites. MyIntuition seems to always have more generous awards than are typically received. Use the NPC on each college website.
If the retirement funds are in a pre-tax account, then the typical advice is not to put them into a trust because of potentially problematic tax consequences. There is no need to do so anyway, since the purpose of a revocable trust is to avoid probate and the retirement accounts will have a nominated secondary beneficiary (of your daughter if your spouse dies) which means they don’t go through probate anyway. So the main assets in the trust would be the $125K of brokerage accounts plus your home assuming you own it. I’m not sure whether this is the type of trust that needs to be declared on CSS.
Interesting, thanks. I will check with them as to whether all of this fuss is for the $125k (and, yes, a $380k house), which I guess would be good from a financial aid perspective, but raises other questions about whether all the legal and advising fees are worth it (and whether in the tragic circumstance that we did both die, our daughter would be that much better off with this lawyer and this advisor than with a presumably sympathetic probate judge)…
We just did a revocable trust for our estate, the lawyers’ fees were about $6K for setup. You should compare the setup cost plus the cost of your own lawyer’s fees for settling an estate with the cost of statutory probate fees (e.g. for us in CA these would be about $13K on a $500K estate, assuming your retirement accounts stay outside it, see The total cost of probate in California in 2024).
Our lawyer suggested that our total costs outside of probate could be lower (though you’d still need to hire a lawyer to help), but that might not be the case in other states with a smaller estate and lower statutory fees (high house prices often make statutory probate a costly business in CA, typical costs could easily exceed $30K, whereas private lawyer’s fees were estimated at around $15K). The formal probate process can also take longer to reach a resolution.
Simply naming someone as beneficiary of a revocable trust does not translate into that person having to report it on the FAFSA. First of all, it’s revocable. You could change it tomorrow. Second, it doesn’t pay out unless you’re dead - which I assume you are not. Your D does not “have” any money, so she cannot borrow against the possibility of inheriting some future amount of money that might not be there.
P.S. I’m guessing the suggestion of the trust is to have something in place so your D doesn’t get a whole bunch of money at a really young age. Don’t forget to revisit your trust when your D is older. It may make sense to change things once she’s old enough to handle the money herself. For example, it may be better to keep the retirement accounts outside the trust, with your D as beneficiary.
I’m not sure I understand what the supposed benefits are of creating a revocable living trust in your particular situation. Would this be for better tax treatment? An easier way to settle estates when both you and your spouse are gone? Easier access to more need-based financial aid for your daughter? Better asset protection for your daughter against creditors and maybe a divorcing spouse after her parents are gone? And what assets would be placed in the living revocable trust? As far as need-based financial aid is concerned, I don’t see how this move could possibly garner more aid.
Have you figured out an executor in the very unlikely event that you both die?
And some annoying questions- do you have life insurance and disability insurance? Unless either of you is in a very risky profession-- or jump out of planes on the weekend- you are far more likely to become disabled than you are to die.
I would focus on the basic building blocks of a sound financial and estate plan- life insurance, disability insurance, a will, an executor who is both financially savvy and very well organized, a guardian if your D is still a minor.
A trust sounds unnecessarily complicated in your situation (and adds fees to what is a pretty simple estate plan for now) and I’m not sure what the upside is.
It is worth an hour of a paid fee to a lawyer in your own state IMHO. Just a reality check if the advice you are getting is from someone who handles estates in a different state. Even small stuff can trip you up. (not you- you’ll be gone… but your heirs). Ask me how I know…
Thanks all. Kelsmom, I agree it’s important that it’s revocable, and that’s why I’m probably not going to argue too strongly against doing things the way my wife’s family always does things for now…
That said, BellknapPoint, I also don’t understand the point of all of this for our situation…others in my wife’s family are more prosperous and used to doing whatever this advisor says, but I feel like this is just a default recommendation based on what her siblings are doing…
And Blossom, yes, we do have both a first and back-up executor, and in part because my wife has strong (and unpopular with the advisor) feelings about that and isn’t focused on the financial aid angle, I feel that’s kind of falling by the wayside…More generally, though, I think we’re financially fine…Aside from the advisor, we’re Boglehead max out our 401ks for 25 year types and we’re in VA, and so even if we don’t qualify for aid there’s plenty of great public schools here so it’s also possible I’m making a mountain out of a molehill…
I’m not sure then. That does seem like an odd suggestion if it isn’t specifically because of weird probate rules etc. I have heard of people living together for many years and never marrying (deliberately) doing this to ensure the surviving partner gets the house, etc. but I agree, I would ask why. It’s certainly not an automatic part of estate planning outside of certain jurisdictions.
you are in a state with expensive and slow probate
you have assets that could exceed the inheritance tax threshold (either on a state basis or if the federal limits reset after 2025) since a revocable trust makes it easier to pass assets in ways that bypass the estate of the surviving spouse.
If your spouse’s family are relatively wealthy then the second seems quite plausible (they have likely been doing this since before the 2017 changes increased the threshold).