I recently had a client approach me with the idea of setting up a trust for their student, hoping that it would disqualify the money from the financial aid formulas. Thank goodness they asked before moving forward. The cold reality is, a trust is one of the worst ways to go if you are hoping for financial aid. Why, you may ask? Let me tell you…
First, trusts are generally considered a tool of the ultra wealthy used to avoid paying taxes. This is a common misconception, but the operating word here is “common”. Many financial aid officers will look at an applicant with a trust and mentally stick a silver spoon in the student’s mouth. Unfair or no, this is going to work against you when you’re competing for grants and scholarships against other students who do not have a trust.
But let’s just say that you have a financial aid officer that understands that not all “trust babies” are wealthy. You’re still fighting an uphill battle from a financial aid standpoint.
This is because the financial aid office considers the the trust to be an asset, and the money contained therein as available for college expenses. This is true regardless of the terms set forth in the trust document. Even if the student can’t access the money until they’re 30, the college is going to consider that money from a financial aid eligibility standpoint. So let’s look at what that means when we run it through the formula.
If your child is the beneficiary of a trust, whether or not the trust is available, the FAFSA will reduce aid eligibility by 20%. There is no Asset Protection Allowance for the student. This means that for every $10,000 put in a trust for your student your EFC will increase by $2000.00. Over four years that’s an $8,000 reduction for every ten grand, which works out to 80%. The same goes for UTMA’s, UGMA’s and (sadly) gifts from grandma and grandpa, if done through typical estate planning strategies.
Bottom line, if your child is the beneficiary of a trust, it’s going to hurt come financial aid time.