Trust fund and FA

calmom
Wed, 22 Jul 2009 20:30:30 +0000

if she does get a lump-sum payment for her work (could be as much as $12K), and she has flexibility with respect to when she can take it (i.e., she is not starving), is there a optimum time, with respect to FA planning?

If your nephew will be starting college in fall of 2012 (applying for financial aid for 2012-2013 year), then your sister’s 2011 will be the “base” year for financial aid. Money she bring in during 2010 will not be counted, so it would be in her interest to either get paid by the end of 2010, or defer income from 2010 into the year 2011. With the latter choice, the money would then get counted for the subsequent year of financial aid, but at least at that point the student knows what college he is attending and has a better grasp on financial aid policies.

It doesn’t sound like your sister makes enough money that it would be significant, however. If her typical annual income is $20K and one year she does very well and earns $35K… she still is on the lower end of the income spectrum and would not be expected to contribute much.

The problem would be if there was a larger windfall – lets say that typically she earns $20K annually and one year she gets lucky and pulls in $80K – that is where the financial aid gets thrown out of whack.

But let me put it another way:

Right now you have a known and an unknown. The known is that there is $35K in a trust fund. IF that money is invested in a low-risk investment, such as in bonds (which can be done in a 529) account, it is sure to be worth more than $35K in several years. For example, at 3% interest compounded quarterly, it would be worth $38K in 3 years.

The unknown is where your nephew will want to go to college and what it will cost, and whether or not the college he chooses will give him a significant amount of need-based aid. He may opt for community college or an in-state public – and the economy being what it is, need-based grant money may be harder to come by a few years down the line. Or, he may do very well in school but earn merit money and not need to rely on a need-based award.

That’s why it’s a “bird in hand” situation and it would be nuts to touch that trust money at this point.

As for both your nephew and your sister: the bottom line is that it is ALWAYS better to focus on increasing personal “wealth” rather than focus on increasing eligibility for financial aid. (I put “wealth” in quotes because if your sister can start earning $30K a year and manage to pay off some of her debt, she won’t be rich – but my point is that she will be better off in the long run). Need based financial aid is a big “maybe” – but it NEVER compensates fully for the value of lost dollars. That is, on paper, your sister would have to spend $5 of trust money for every $1 of decreased EFC for your nephew – what would your nephew have to show for all of that? Does it make sense to spend $20K hoping that several years down the line, a college might then offer the student an additional $4000 in grant money? (To me, by that math, the family has lost $16K, not “gained” $4K)

So really, its a matter of common sense. The more CASH that is available to your nephew in a way that is within the CONTROL of the family, the better.