I will inherit about 100K from my dad when he passes. Up until now, he has had it in a revocable trust with my (childless) brother as executor, because he didn’t want my sister and me to inherit money and then have it taken by FAFSA/CSS. However, he would like to change the trust so that all 3 of his kids are beneficiaries now (he is in early dementia and understandably wants things fixed). My understanding was that, even if he passed, and the money passed to us, FAFSA would only assess us on 5% of the inheritance. Is this true? I read something about how it wouldn’t be assessed as income if we inherited it in the form of an IRA. Any comments/advice welcome!
You can’t fund an IRA retroactively… so is the money currently in an IRA or held in a non-retirement brokerage account?
1 Like
The FAFSA and CSS are not going to “take” your money. They are financial aid application forms and nothing more.
I think you may find some limitations on what you can do with this money. Not sure it can retroactively be placed in an IRA. Plus, IIRC, if it’s in a regular IRA, there will be penalties and tax implications if you do need to use it.
I’m not sure how this all is reported in terms of assets…but for the FAFSA it’s about 20% of the value added to your family contribution if it’s reported as a student asset. And about 5.6% if it’s reported as a parent asset.
Are you eligible for need based aid without this added money? Or are all the grands out of college now?
2 Likes
An inherited IRA (if in fact, that’s where the money is- in an IRA account) has rules on your Required Minimum Distribution. You can google it to see how much money you will be required to take out annually. It doesn’t work the way YOUR IRA works (i.e. based on you eventually retiring and starting to take your minimum distribution).
But again, you can’t decide now to stash 100K in your dad’s IRA after the fact. It was either put into an IRA or not. Can you clarify how the money is being held now?
And I’m a little confused about the comment that your dad wants everything equal… even with your brother as executor, there is nothing to prevent him from ALSO being an heir… so what has changed?
2 Likes
Me thinks this is a discussion with a lawyer specializing in trusts…or who set up this trust. They can tell you what can or can’t be changed.
3 Likes
It is absolutely not in an IRA–I just checked. It is the typical middle-class situation where he has a trust that holds the house and the securities–the securities being about 60% of the trust depending on stock values.
I know that the FAFSA can’t “take” the money–but a college potentially could! At this point, it seems highly likely that my D24’s college won’t be funded through a FAFSA-influenced source at all (if her aid is entirely merit-based). Since I am not hoping for my dad to pass, or grasping for his money, I just wanted to make sure that he could feel at ease putting all three of us kids as heirs through this trust he has set up (instead of just my brother, which he has done, and asked my brother to distribute the money equally). Apologies for how ignorant I am about the situation.
Not ignorant at all.
Yes, your brother can be executor or trustee (or both) and the will can specify that the assets are to be distributed evenly among the three of you.
3 Likes
Great! I will tell him that this solution is fine. 
It is a lot… safer? to designate how you want the assets distributed than to tell an adult child “do the right thing once I’m gone”.
Of course you all love each other. Of course you would never act in any way that wasn’t in keeping with “what dad wanted”.
And yet the courts are filled with adult siblings hashing it out in front of a judge, spending time and money figuring out “what dad really meant”. Better to have inarguable proof- dad spells out his wishes, in writing, with witnesses, then to leave it up to the gods of inheritance… who certainly seem to take delight in siblings arguing.
If there is a sibling with special needs-- again, a trust, spelled out in the will, that can get complicated. If everything is being split in thirds, no need for anyone to wonder what dad wanted.
5 Likes
Actually only two of us siblings are friendly (my brother and me). I just can’t figure out what he’s done with this “trust” that makes it impossible to make all three of us the heirs. My sister is now free of FAFSA evaluation, since her daughter will go into senior year in college next Fall. I think he has been told that if I am made one of the beneficiaries, then my future inheritance will evaluated by FAFSA as currently at my disposal. This is what I read about “revocable trusts” online. If he really wants to avoid sibling battles, but if I will be “taxed” by FAFSA on my future inheritance, he should just make my brother and my sister the beneficiaries as of this summer, but then specify that my brother is to give me my third. Unless, that is, I totally don’t understand what’s actually going on! 
I think I’ll talk to my brother about this situation. Other than the college FAFSA evaluation part, I think he would understand what the implications are. Thanks for your help in getting through the wooly tangles.
If this is a FAFSA only issue.
-
Does the college your child attend meet full need for all students?
-
Were you eligible for any federally funded grant aid like the Pell Grant without this inheritance?
1 Like
D24 does not attend a college yet. The front-runner so far (UGA) will pay pretty much her entire tuition through the state lottery scholarship, so FAFSA is a non-issue. We’re definitely not Pell-eligible (we’re a doughnut-hole family), but the final reach school that will report to us some time next week officially guarantees to meet full need. However, I’m not sure that includes “no loans” for people in our income bracket. So perhaps I merely need to wait until next Friday, and then the odds will be with me that he can make us all beneficiaries and not worry about it? But our income will be evaluated by CSS every year if she gets into that reach school next week.
@BelknapPoint is inheritance viewed as income?
Here’s what I read on a financial coach’s site that made me think our trust-beneficiary status would be evaluated. But if it were only evaluated at 5%, then no big deal.
Revocable Trusts: These trusts can be altered or terminated by the grantor, and the assets are considered part of the grantor’s estate. For financial aid purposes, revocable trusts are treated as parental assets, and a smaller percentage of the trust’s value will be considered available for college expenses.
And here’s what Bowdoin says (Bowdoin is NOT the school she’s waiting on, but they have good financial info):
Trusts can be set up in a multitude of different ways, and some can be incredibly complex. If the student or parent is a beneficiary of a trust, you must report the value of their share of the trust as an asset on the FAFSA and the CSS Profile, regardless of when or whether you have access to its principal. The only circumstance in which you should not report the value of a trust is if there is a court-ordered restriction of access. The value is not always immediately clear, and we recommend reviewing this information to value your share of a trust for the purpose of applying for aid.
If the student or their parent is the beneficiary of a trust, Bowdoin requires the following documents as part of the student’s financial aid application:
- Most recent trust tax return (Form 1041)
- Most recent Schedule K-1 (Form 1041) for each beneficiary in the student’s household
- Most recent trust investment account statement
- Trust instrument
I’ll get real granular really quickly.
Does your brother (or someone else) have Power of Attorney so they can pay your dad’s bills, make financial decisions on his behalf if he is no longer able to?
Does your dad have an advanced directive, i.e. instructions on what he wants if he’s on life support/intubated, hooked up to machines?
While you’re discussing the estate plan with him… make sure you’ve got the other documents all signed and executed.
4 Likes
Until the trust becomes irrevocable, if someone other than you (the parent), is the grantor, it is irrelevant for the FAFSA. The references you have refer to irrevocable trust.
2 Likes
Thank you both for your help! This gives me an idea of what to discuss with my brother (and then my dad) going forward from here.
Also, assets are assessed each year, so 5.6 percent times 4–if they are assessed at all.
1 Like
Just to clarify, you aren’t currently a beneficiary of the trust? If not who is?
The danger here is that your siblings may not have a legal obligation to give you your third because once they’re named as beneficiaries the money it’s theirs. Your dad’s Will may not supersede that. I’m still unclear what the benefit of the trust is. If your dad held the assets outright and bequeathed them in his Will, you would not be the “owner” until he actually passes away, the Will is probated and the assets transferred.
1 Like