If that were my kid, and financial aid were involved, I would do what is possible to time the receipt of the inheritance so it impacts the aid the least and strongly suggest that the kid gift the money to me. It’s the parent posting here, and I suggest the idea be presented. Yes, there is risk the parent makes off with the money because as I stated in my post, there can be no conditions attached to the gift. The parent likely can do more with the money— in my case I can get state tax deductions for a 529, in some states even carry forwards in deductions, in MD for 10 years! A college kid is highly unlikely to have the income to take advantage of such deductions. Average college kid isn’t going to be stashing money into an IRA, Roth or otherwise. Much more flexibility most of the time with the parent.
It’s not the tax implications of the inheritance that are at issue here. FAFSA , PROFILE and other financial aid documents often address UNTAXABLE and UNTAXED income as well as taking AGI from the tax filings. A monetary gift to a parent is not included in FAFSA. To the student it is. Them’s the rules. In my limited experience, the FA office is very interested in any money or benefit a kid gets from anyone other than the custodial parent. Grandma’s and NCP’s 529s paying costs for the student are reported as income to a student for financial aid purposes. How an inheritance to a student is treated by FAFSA specifically , I do not know, but I guarantee that some schools out there paying out fin aid from their own funds will include it.