You say it has to be used for college. Is that a provision of the inheritance or annuity? If so, how would you use it to pay the family debts?
Also, as pointed out upstream…how much if this annuity can you withdraw? Is this a tax deferred account? If so, what will your tax liability be if you withdraw the whole sum (I believe if you do, this Distribution will be considered on your financial aid forms next year…someone can correct me if I’m wrong).
If it is $100,000 then pick a different school where it will be enough.
@mom2collegekids, you can name ANYONE as beneficiary of your life insurance policies and you don’t need permission of a spouse. You can name the garbage collector if you want to or the girl scouts or Bill Gates. Insurance benefits are paid outside the estate (unless the beneficiary is the estate) and the creditors and beneficiaries of the estate have no say in how those proceeds are spent. They are not marital assets and a spouse has no claim to them if they are designated to be paid to someone else. If no beneficiary is designated, then the proceeds become part of the estate and then state law may control how they are distributed (spouse must get half, or children from another marriage must get 1/3, or whatever rules that state has).
It is unlikely the mother could put a restriction on an insurance policy that stated it could only be used for education. Once it is paid, it is paid. Since this was to a minor, some states do have rules that the insurance can’t be paid to a minor and maybe it was put into a trust directly, but OP is saying he bought an annuity with the proceeds, so the rules of the annuity would now control. Can the funds all be accessed immediately at 18? Probably not. The whole point of an annuity is to buy it now at a lower price and get more as the fund matures.
@twoinanddone
I should have said many states and not all states. In community property states:
However, in community-property states, your spouse typically would have to sign a form waiving rights to the money if you designate anyone else as beneficiary.
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In some non-community property states, you can name a blood relative. In some states I guess you can still name anyone without spouse consent but that is crazy if marital money was used to pay for the policy.
The issue is that if community property money is being used to pay for a policy in a community property state, then those proceeds cannot go to a non-spouse without the spouse signing a waiver.
Retirement issues can be similar. When H retired, he had to select that I would get 100% benefits otherwise I would have had to sign a notarized waiver agreeing to something less.
Example of life insurance in my community property state: My father-in-law bought a policy on my mother-in-law’s life. Mother-in-law is the “owner.” Beneficiaries are the four adult children. If my father-in-law did not sign an explicit waiver, then, on my MIL’s death, he is entitled to half the proceeds of the policy, despite not being named a beneficiary, because the policy is being paid for with marital property assets.
Soundd like the OP tried to game the system and ended up with a non-qualified annuity reportable for FAFSA and institutional aid, likely a hefty commission paid to the insurance agent, and the account possibly subject to early withdrawal penalties, plus the withdrawals counting as income on the next year’s FAFSA and institutional aid forms. Wow!
Madison85, I read the “Don’t Take the Bait” article, and it gives me the creeps, because what these college advisers have done is extremely similar to the approach taken by many financial advisers hawking products to elderly people (such as my parents-in-law). Free lunch; selling a life insurance policy to an 80 year old with premiums of $30,000 annually; buying an annuity with a high commission for the agent that has high surrender charges. It’s sickening.
Greed.
Can a minor really ‘gift’ money to an adult who is his guardian??? Seems sketchy to me
I don’t think the OP wants a gift from his son. I think he wants his son to use all of the assets to pay the family debts down. And he feels that by doing so, the student will get sufficient need based aid from Northwestern to cover any costs the parent cannot pay himself.
If all the OP wanted to do was transfer the funds to his name for financial aid purposes…he would open a 529 account. Of course, this might not matter at all for NU, which is a Profile school. And that is where getting rid of the asset money altogether comes into play.
I understand that this is a bid to get aid from NU, and maybe not a gift per IRS rules, I just thought that a minor’s money was protected in some way from transfers like this which have no direct benefit to the minor. Once the son is 18, I could see him agreeing to pay off family debt but this seems odd. The people holding the annuity should certainly balk at this use of funds, right?
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Can a minor really ‘gift’ money to an adult who is his guardian??? Seems sketchy to me
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That’s really not what’s being considered. It sounds like the student will be using his life insurance proceeds to pay down the medical bills left by his deceased mom. Not sketchy at all. It would be a win/win for the family. The family wipes away some debt; and the student qualifies for more aid. Otherwise, the student pays the school, and his family is still in debt from the medical bills (which life insurance SHOULD be covering anyway.)
That all will work, mom2, IF the father’s income really is low enough to have NU compute a family contribution that is what the father thinks it will be.
It assumes that the father’s income won’t increase in the next year as well.
It assumes that the son actually can withdraw the full value of the annuity without penalty.
It assumes that any withdrawals from the annuity are not subject to taxes.
It assumes that NU will allow this student to defer his enrollment.
I just thought, if money was being held by a third party (not just a bank account) for the benefit of a minor, that the money couldn’t be used for things not related directly to the benefit of the minor. I could see for example, that the minor might be in better shape if the family moved to a better school district or sent him to private school, but these medical bills are the responsibility of the Dad, not the child
Perhaps the OP would care to chime in - wonder if he has been stalking his thread…
What is this annuity?
Did you pay a financial aid planner to come up with the idea of an annuity in order to try to exclude the money from finaid consideration?
How much can be withdrawn per year?
Are there penalties for withdrawing more than an annual limit?
If you got rid of the annuity to pay debts, how much are the penalties, taxes, forfeitures?
Why didn’t you go with a 529 originally?
Once the life insurance beneficiary is minor, insurance company hold the money in annuity account until minor becomes 18 yrs old. Once minor becomes 18, he can surrender contract. Every year they send you 1099 int. form for tax.
So the annuity was a requirement of the life insurance company and no shady college planner was involved and getting a commission off the top? If so - that’s good to hear!
Are the medical bills the responsibility of the father or the mother’s (and thus her estate’s) alone? If the mother listed the son as beneficiary, was it to protect the funds from the creditors?