Child Loan to Parent

[mikedmks]

I have a client who's child is interested in attending a private college next fall. We are completing the FASFA and Profile forms.

The mother's income consists of SS and about $5,000 from being a caretaker. Her ex-husband died 3 years ago leaving her will full time care of their children and no family assets except the house. The family (mother + 2 children) have no taxable income.

The child will be 18 next week and will receive $100,000 from the life insurance policy on her father life. If the asset is to be listed on the FASFA / Profile as the child's asset, financial need will be impacted by, I believe, 35% of this asset. Before completing the forms, can the child gift the monies to mother who in turn pays down the mortgage on her house THUS limiting the impact on financial aid to only 6% .

Would the asset still be considered the child's asset?

[drew]

Obviously if the $100,000 shows up it must be reported and it is a killer to any financial aid, like over 100% if left in place.

I do not recall how the questions are worded---however if she completes the forms prior to being legally entitled to the funds then the correct entry may be zero? However if the funds are already vested in her name--then the $100,000 shows up and needs to be reported.

However if she were to gift the sum to Mom prior to completion of the FAFSA it would disappear. I'd be uncomfortable with a $100,000 gift to Mom for other tax reasons however. I won't address morality. But it would count zero not 6% since home equity doesn't count!

But if Mom opens up a 529 she owns for kid and kid puts all $100,000 it cuts impact to 6%, then if Mom changes beneficiary to other child it may drop to 0% (I do not recall if other folks 529's come into play.) But all this w/o any gift tax issues.

Note , if Moms tax returns are short forms then she doesn't even report her assets on FAFSA, last I read rules, then her 529 would not show up at all--and she gets some asset protection if it did so it probably would not hit 6%

Hey, if you think the rules are odd--I didn't write them!

[bwilk]

Just goes to show how important it is to properly name the benficiary of a LI policy. Are there any advantages to making the child a beneficiary in front of the other parent? I suppose if a divorce occured then giving a large sum to an ex is not a pretty thought, but neither is this situation.

[texascfp]

Before completing the FinAid Forms how about purchasing a single premium immediate annuity (SPIA) for 10 years, with the first payment scheduled for next year, sometime after FinAid filing time. That clears the child this year and next, and lands about $10,300 of income on FAFSA for last two years. (about $4,000 hit to EFC, and loss of probably $2-3,000 in grant money for Jr and Sr year). That looks better than losing $35,000 a year for four years. It also protects the asset from foolish spending or debt collectors if Mom hits hard times.

Another alternative is to just list the asset and then have the child write to the financial aid office (What I mean is a carefully crafted letter written by a knowledgable professional that touches all the right hot buttons, but sounds like it's written by the student). If this family's situation can't stir the hard-boiled sympathy of financial aid officers, I don't know what will.

Good Luck!

[This message has been edited by TexasCFP (edited January 29, 2004).]

[drew]

Annuities do not seem to be counted assets, so if the annuity is scheduled for 5 years out--ther eis no inocme or asset effect for FAFSA.

But be careful, annuities do not get capital gains treatment when you unwrap them, so design the exit as well.

[user_660]

TexasCFP is referring to an IMMEDIATE annuity not a deferred annuity. Immmediate annuity will generate income for 1040 and Fin Aid.

TexasCFP, is there an income allowance, even at Private colleges?

[drew]

The last time I looked at the private college format there was a very limited income exclusion for the child--but it acted in a reverse way as well, the college formula assumed a certain minimum income say from summer work and assumed you could contribute from same--even if you didn't work. It was only like $1500.

I have a major problem with reporting an income stream. College aid officers are not stupid. If you report an unearned income of say $3000 a year its loggical to assume that you have some modest asset base out there someplace to be tapped. They will likley impute its presenct--wouldn't you?

So if you can get the asset honestly uncounted or much lower counted via a 529 I would explore same.

Or if you can get an annuity that doesn't begin to pay until 5 years out. But I suspect the newer private college forms (didn't check) ask about annuities. Have you checked the actual newer forms used by the processing service? Also I do NOT know if the private forms address sibling 529's, do you?

Obviously this question hits some social policy issues. But the bottom line from the students standpoint is that the entire $100,000 will be consumed for education if not moved. Just as in estate and eldercare planning there are some moves which are within the letter of the rules and some which are outside them. I think as an advocate for the child one can look at all the moves which are inside the law.

I believe one could act in the childs interest via a one or two step 529.

[Gorge_Walton]

If you want to take the loan then you have to know that after taking the loan if you are not paying within the certain period then you'll get some notifications regarding the loan. There are some debt collection process rules and if you don't know these then you have to be aware. This may cause some consequences and you may face some court problems. You can search