Funding your child’s higher education can be daunting, and every parent waits with bated breath to see how much the Free Application for Federal Student Aid (FAFSA) might help chip away at the monstrous bill. But the superficially “straightforward” process of reporting your assets and income can be confusing when financial instruments like living trusts come into play. At Provenza Law, we’re here to shed some light on some of the most frequent questions we receive:
Can a Living Trust Affect My Child’s FAFSA for a Chicago College or University?
The short answer is “yes” – with some exceptions. The FAFSA requires both the parents and the student to disclose their annual incomes and assets – including those contained in most living trusts. The one exception is a trust to which access has been restricted involuntarily by a court or other legal body.
For example, a trust that has been set up for a minor following an accident settlement may be restricted by the court until the child reaches the age of majority. If neither the parent nor the child has access to the funds yet, this account is not usually necessary to disclose on the FAFSA. Trusts set up as part of a 529 plan (qualified tuition plan) are also not reported as income or assets because access to these funds has been legally limited by the government.
However, living trusts that have been voluntarily restricted (by the person who set up the trust) must be reported and counted. For example, if a grandparent set up a trust that could not be accessed by the beneficiary until he or she turned 35, the restriction may be “involuntary” for the child, but it was voluntary for the grantor at the time the trust was established. These assets must be reported.
How Much Does A Living Trust Affect My FAFSA?
The extent to which a living trust may affect your FAFSA depends on several factors, including who is named as the beneficiary. A trust that benefits one or both parents affects the FAFSA less than one that benefits a student since the expected college contribution for a student is around 20% of their assets while that of a parent is only 5-6%. This means that if you as a parent have a living trust worth $100,000, the school will expect you to contribute $5-6,000 toward your child’s education.
But if the same trust benefits the student, he or she will be expected to contribute up to $20,000! Whether the money is accessible or not is immaterial. Your eligibility for funding will be reduced by your expected family contribution (EFC) regardless of whether the assets can be accessed now or in the future.
In addition, living trusts that earn interest or dividends from investments may affect your FAFSA even more because the additional money is counted as income, which factors more heavily than assets.
The Bottom Line for Trusts and FAFSA
In short, living trusts are valuable for many reasons, but they won’t help you shelter money or give you an edge when it comes to getting financial aid. Living trusts are designed to ensure assets are distributed to the right person at the right time. But sometimes they do have unintended consequences. That’s why it’s vital to contact an estate planning attorney before you set up any will or trust. An experienced lawyer will help you think through the ramifications of your plan and determine the best possible way for you to achieve your long-term goals.
Call Provenza Law Today for Living Trusts and Estate Planning
If you’re helping a child get ready for college and have questions about how a trust affects you or if you want to set up a trust but need help avoiding potential pitfalls, call Provenza Law today. Our experience can help guarantee your success both now and down the road. Contact us to learn more at (847) 729-3939.