<p>I have 3 boys. One will be a Sophomore this year so I thought I had better find out about this.</p>
<p>my FIL has been putting money in accounts for the boys.</p>
<p>The accounts are in HIS and their names. He does the before tax thing.
Where you can give a way a certain amount? or something like that. We havent really discussed it.</p>
<p>I think the money will be theirs IF he doesnt need it when he’s older. </p>
<p>He is only 56, so the boys will be in college way before he needs it or passes(hopefully)</p>
<p>Will this hurt when/if they apply for financial aid?</p>
<p>I’d hate for him to lose his money in case he needs it, and for the boys to not be able to apply because of his money. Thanks for the help!</p>
<p>I THINK, if your FIl has control=like a joint savings account- and if the money is not reported under your boys SS#, then it is your FILs money, BUT if he is officially gifting $10k+ each year, to the boys, then it would be the boys money, You need to find out how the accounts are set up. The key question to begin a discussion with your FIl is, “How is the interest reported on the money?” That ought to lend some real clues.</p>
<p>He cannot have it both ways, your FIL will need to pick one way to look at the situation and stick with it. If he puts aside money with it in his mind to be available maybe someday to the boys, but legally his, then you’ve no worrieds about fin aid</p>
<p>somemom is absolutely correct. You need to understand who is paying taxes on the interest/dividends/capital gains on this money, and how they are structured. I am not aware of exactly how you put away pretax money outside of an IRA or a 401 k though…Health Spending acct.???</p>
<p>If anyone knows please advise. If he has set up say a UGMA (UTMA) account, it is considered by the IRS to be the kids assets, and they are responsible for taxes…and also would be responsible for reporing it on the FAFSA as a “student asset”. </p>
<p>Do you think your FIL is trying to pull a fast one? It sounds to me like he is shielding income from the IRS, without committing to using these funds to assist your kids. I have heard of many, many, horror stories regarding what I see in the future. </p>
<p>PS. If the funds are in a UGMA/UTMA…they are already gifted to your kids. It is thier money. They have the responsibilities for the taxes and the assets as far as the tax code and fin aid.</p>
<p>If it is a 529 plan, nobody will pay taxes on the interest and dividends IF the money in the account is used for college expenses. The interest and dividends accumulate ‘tax-free’ until the money is used. Then if used for college expenses, there is zero tax on the interest and dividends. </p>
<p>Now, I do not know how 529 plans affect the financial aid calculation.</p>
<p>Best advice . . . consult your tax advisor.</p>
<p>My understanding is that if the grandfather owns a 529 in the children’s names, it does not count as the children’s assets, but it does get reported on the CSS and on the FAFSA. It does not count toward the financial aid award for the first year. However, if you tap into the 529, it is POSSIBLE that the school will count it against financial aid for the following year, because the student used the money-- s/he got it from somewhere, so it MAY become part of the calculated asset for the next financial aid application (they have to be applied for each year). So it MIGHT make sense to wait to use the 529 until later years. That way, if the school considers it an asset, you will not be hit as hard for as many years. It’s very difficult to figure out. </p>
<p>The main thing is that the money should not be the parents’ asset (school can take something like 5%-6% of parents’ asset), and definitely not be the student’s asset (20%?). The best way to save for college, if at all possible, is for the grandparents to do it. </p>
<p>You need to sit down with your FIL and discuss this. Telling him that you are starting to plan for your kid’s highschool years, and that you need to understand the savings accounts.</p>
<p>sblake7,
I was surprized to read this in the link you provided: </p>
<p>"Custodial 529 college savings plans owned by dependent students, where the student is both the account owner and beneficiary, are not reported as an asset due to a legislative drafting error in the Higher Education Reconciliation Act of 2005. When owned by an independent student or a parent, the account is still reported as an asset. "</p>
<p>It sounds like I should change the account owner for my kids from me to their names. Is there any reason I can’t or shouldn’t do this?? Thanks, EM</p>
<p>Yes, entomom, you can do that, but once you do, the change is irrevocable - the kid owns the money. The biggest downside is that Congress is likely to correct that error, probably quietly and in the dead of night, and then the money will be assessed at the kid’s rate. I’d rather risk it being assessed at the parental rate. </p>
<p>Also, it’s not reported on FAFSA, but that doesn’t mean it’s not reported on Profile. And if it’s in the kid’s name, it will be assessed at the kid’s rate in Profile schools. </p>
<p>So unless your kid is definitely going, in the next few years, to a FAFSA only school, the risks may be too high for the rewards.</p>
<p>The treatment of 529 accounts has changed recently-- there are a couple threads on this topic where we’ve discussed in some detail. Still pretty confusing (to me, anyway), and I don’t claim to be an expert in any of this stuff. My understanding is that SOME 529 accounts provide an effective way to shield college savings from the aid formulas. </p>
<p>Have a look at the other recent threads for authoritative links.</p>
The main reason I would not do this is because I think it is a loophole that probably was a mistake - I would be surprised if it is not changed in the next year or so. And, as Chedva said, the change would be irrevocable so you would end up with the worst case financial aid scenario - assets in the student name (20% to EFC rather than 5.6%).</p>
<p>If it’s in the boys’ SS#, it will be considered their assets for FA purposes. If it’s a regular savings account, as opposed to a trust account, he should liquidate the account and open another in his name, and he can earmark it himself for their college funds. </p>
<p>If it’s a trust account, then legally the money belongs to the boys, and he can’t change the account. But he can stop contributing to it, and open another account that he owns.</p>
<p>He can also provide in his will that the money in those accounts go to the boys, just in case (God forbid) something happens to him.</p>
<p>You need to find out what type of account it is, in whose name the funds reside, and who has been paying the taxes on the interest/dividends/capital gains.</p>
<p>There is an amount htat can be “gifted” each year, I think it might be $10k per year. When you find out what type of account it is, people wll be better able to answer your question.</p>
<p>^^ Well then the funds are most likely not “before tax”, and your FIL is most likely paying his taxes on the interest. </p>
<p>Technically, I guess it is not in the kids’ names so I don’t think it will have to be repoorted. But when your FIL transfers funds to the boys it will be treated as income to them (I think).</p>