Does inheritance count as income AND asset on CSS and FAFSA?

<p>I have searched this forum and the web for info regarding this and can not find
any recent info. My husband's aunt passed away recently and apparently left him and is siblings an inheritance. We do not have any details as to how much as of yet. Just trying to gather info on how this will affect my daughter's FA pkg for the 2013 - 2014 school year, as well as future years for her and my other daughter who is a soph in high school. It seems like it will be counted twice in the formula..as income and an asset. Besides putting the max ($10000) into an IRA, are there any other ways to 'shelter' the money? And if this is a tax exempt inheritance (not reported on tax forms) how do colleges check this receipt? Thank you!</p>

<p>I could be wrong…but I do NOT think an inheritance is considered as income. However, if you have this money, it WILL be considered as an asset. If it is a parent asset, 5.6% of it will be added to your family contribution (above any asset protection allowance you have). This would still mean that almost 95% will be left in your accounts.</p>

<p>From what I’ve read in old posts (a few years old), it my have to be reported as ‘untaxed income’. I don’t understand how schools would know that it was received if it does not have to be on income tax forms. I understand the money it earns (interest and dividends) will need to be reported. Depending on how much the inheritance is (which we have absolutely no idea yet if it’s a couple thousand or much much more) the interest and dividends may not be significant. I am considering putting most in both of our IRAs for both the 2012 and 2013 years. But if it has to be reported as income, our EFC could go way up, which means we will need the money to pay for college tuition, etc.</p>

<p>You don’t report it as income on your federal tax return… but the asset would be reported on the FAFSA (or CSS Profile) once you have the money in hand. Note that it can take quite a while for money to be paid out of an estate depending on the complexity (I am the personal representative for an estate that is finally closing after EIGHT years… we did make a couple of distributions along the way, but about 1/3 of the money has not been distributed yet).</p>

<p>I don’t recall what the FAFSA asks, but the CSS Profile asks about the amount of contributions to retirement accounts each year.</p>

<p>Some states have an inheritance tax so you have to check your state law. It would only seem fair that an inheritance be used to reduce state/federal government assistance in an FA package.</p>

<p>intparent–we were told by someone close to his aunt that the inheritance was set up so that it would not be taxable at all. We will see once we meet with the lawyer. I had no idea it could be so long for the money to actually be distributed! My gut feeling is that the family will not contest anything and will just agree with however it was set up…but of course you never know what could happen. So you think that on the FAFSA and CSS it only needs to be reported as an asset (not as income as ‘untaxed income’)?? From what I understand, that would be better for us because it will affect of EFC by a lesser amount. My daughter is only getting the subsidized Stafford loan from FAFSA as of now, and we’d love to be able to keep it unsubs. And she is getting a few thousand in institutional grant money, which we’d like to keep also. No Pell or Perkins or state aid involved. She goes to a pricey private univ – being able to hold onto these two is all we’re looking for! But to put it most/all in an IRA – THEN learn we have lost those would be tough as the money would be in the IRA and would not readily available…</p>

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<p>If the money is currently in an IRA or other retirement vehicle, it may be possible to roll it directly into a “beneficiary” type IRA. The beneficiary would need to take minimum withdrawals each year based on his/her age, but the bulk would be invisible to FAFSA.</p>

<p>I believe if the money is earnings that were not taxed during the Aunt’s lifetime (a deductible IRA contribution, a non-Roth 401k contribution, etc), the beneficiary might receive a 1099-R and owe income tax (income in respect of a decedent) if it isn’t rolled over or allowed to be rolled.</p>

<p>There is no federal income tax on inheritances, so it will not show up on your Federal tax forms, which is all the FA people look at. Some states have an inheritance tax, but the colleges don’t ask for state tax returns.</p>

<p>Whether an inheritance counts as “untaxed income” on the FA forms has been the subject of great debate, with no definitive answer that I know of. My feeling is that if it should be counted as untaxed income, it would be explicitly called out in the instructions. Since it is not, and it is not taxable at the Federal level, I don’t believe it would count as untaxed income, but that is just my opinion.</p>

<p>As for the 2013-2014 school year, have the executor delay the payout to you until after you have filed your financial aid forms for 2013-2014. Then the value of the asset won’t be counted until the 2014-2015 school year.</p>

<p>As far as sheltering it - one way would be to use it to pay off your debts, including your mortgage (assuming house equity isn’t counted). If you have been postponing any house repairs or you are driving ancient cars, spend the money to take of those before you file the next set of forms in 2014.</p>

<p>There are some financial instruments you can use to shelter the asset at most schools, such as an annuity or single-premium whole life insurance or whatever. These have significant drawbacks though, so you would want good advice about these.</p>

<p>I think it would be reported as an asset on FAFSA rather than income. This article gives a good overview. </p>

<p>[Inheritance</a> Effects on a Pell Grant | eHow.com](<a href=“http://www.ehow.com/info_8623497_inheritance-effects-pell-grant.html]Inheritance”>http://www.ehow.com/info_8623497_inheritance-effects-pell-grant.html)</p>

<p>I wouldn’t view an eHow.com article as authoritative though. Especially given that author’s (lack of) credentials.</p>

<p>"Kristen May holds a Bachelor of Arts in psychology, specializing in childhood development. She has been writing for several online publishers covering topics such as entertaining, parenting, cooking, health and wellness, marriage and personal finance. "</p>

<p>I agree - not an authority, but there doesn’t seem to be an authority since FAFSA doesn’t speak to it. I think the analysis is sound and is line with the advice given here.</p>

<p>Thanks to all of you for your input! I think we will go with only reporting it as an asset, (not income, too) and also fund our Roth IRAs for both 2012 and 2013 if we receive it before April, then hope for the best…that we keep the subs Stafford loan and the small institutional grant! Thanks again!</p>

<p>There can be federal and state income tax on an inheritance if it is an IRA and the beneficiary receives a distribution. If the beneficiary receives a distribution, a Form 1099-R will be issued and reported to the IRS.</p>

<p>Please see IRS Publication 590 regarding when an inherited IRA is taxable (pages 16-18 and 23).</p>

<p><a href=“http://www.irs.gov/pub/irs-pdf/p590.pdf[/url]”>http://www.irs.gov/pub/irs-pdf/p590.pdf</a></p>

<p>Excerpt: If you inherit a traditional IRA, you are called a beneficiary.
A beneficiary can be any person or entity the owner
chooses to receive the benefits of the IRA after he or she
dies. Beneficiaries of a traditional IRA must include in their
gross income any taxable distributions they receive.</p>

<p>Similar question
Hi I’m the beneficiary of an Estate that has not yet been distributed. I’m filling out the FSFA and CSS profile. In the last area of CSS supplementary questions is the following:</p>

<p>"Is either parent the beneficiary of a trust or estate? Yes No SQ-123
If yes, provide the type of trust (e.g., irrevocable, revocable, testamentary, etc.) the value, the terms, and other pertinent information about the trust.”</p>

<p>I’m confused I can answer no to this question. I know I’m a beneficiary of an Estate and proceeds will be distributed soon. But since as of today I don’t have the proceeds can I answer no to this question and submit my forms . Since it will be distributed in 2013 and not show up until 2014 when they are a senior at which time I might not apply for financial Aid</p>