FinAid Logo The SmartStudent Guide to Financial Aid
Site MapAbout FinAid
 
Loans
Scholarships
Saving for College
Military Aid
Other Types of Aid
Financial Aid Applications
Answering Your Questions
Calculators
Beyond Financial Aid

Return to
Professional Judgment
 
Trust Funds and Custodial Accounts

Trust funds are ineffective at sheltering money from the need analysis process. Even worse, restrictions on access to the principal may keep the trust fund around throughout the student's postsecondary education, hurting the student's eligibility for need-based financial aid every year. When parents discover the negative consequences, they often ask for a professional judgment review. Similar issues arise when parents conscientiously set up a custodial account (UGMA/UTMA account) in the child's name to save for college, not realizing the negative impact on financial aid eligibility. In both cases they ask for the asset to be disregarded or treated as a parent asset. A widow or widower might also ask for an asset to be disregarded if it represents the proceeds of a life insurance policy on the deceased spouse.

Voluntary restrictions on access to principal are insufficient grounds to justify disregarding an asset. Section 480(f) of the Higher Education Act clearly indicates that trusts are considered assets. It also indicates that time deposits and tax shelters are considered assets.

The only situations in which a trust fund can be disregarded are:

  • Ownership of the trust is being contested in court and the court has frozen access to the trust.
  • The restrictions on use of the trust are involuntary and the result of a court order, such as a trust fund to pay future medical expenses of an accident victim.

A few financial aid administrators will use professional judgment to disregard a trust fund with voluntary restrictions when there are special circumstances relating to those restrictions. For example, if there is a trust established to pay for future medical expenses of a child with a serious illness, the financial aid administrator might decide to eliminate it as an asset even if the trust was not established by court order. Similarly, if the proceeds of a life insurance policy were placed in an annuity held by a trust to pay for future living expenses of the surviving spouse, the financial aid administrator might decide to disregard the value of the trust as an asset, but count the current year's payments from the trust as income. In both cases it is important that the restrictions on the trust be irrevocable. Otherwise, the family can use the trust for any purpose whatsoever. In addition, it is never appropriate to use professional judgment to disregard a trust when the trust was not established in connection with a special circumstance. In particular, Section 2503(c) Minor's Trusts, Crummey Trusts, and variations on these trusts may not be disregarded. It is not possible to circumvent need analysis simply by putting money in a trust fund.

Some parents will ask financial aid administrators to treat a custodial account or trust fund as though it were a parent asset, on the grounds that the money originally came from the parent. This is insufficient grounds for a professional judgment decision, as there is no special circumstance to justify it. Errors in financial planning do not constitute special circumstances.

It is important to assign the correct value to the trust. When both the principal and income derived from the trust belong to the same person, the value is simply the current value of the assets held by the trust. When the family owns only the income from the trust, one must calculate the net present value of the future income stream. It is not correct to multiply the annual income by the number of years of income, as this fails to consider that future payments are worth less in current dollars than their face value. Instead, the value is the present cost of an annuity that would generate the same income stream. FinAid's Net Present Value calculator may also be used to calculate the current value of such a trust. The bank that manages the trust might also be able to provide a net present value for the trust. One could also call a factoring company (a company that buys future income streams, such as lottery prizes and insurance settlements) to see what value they would assign to the trust.

If the trust has several beneficiaries, but the distributions from the trust are at the discretion of the trustee and are not required to be distributed equally, the financial aid administrator may nevertheless assume that the trust's value is split equally. Only when the trust document or the trustee has specified a particular percentage distribution does that override the default assumption of an equal distribution.

Financial aid administrators should always ask for a copy of the trust document before making a decision to exclude all or part of a trust as an asset or before assigning a value to a trust.

Additional information may be found in FinAid's section concerning Trust Funds and Financial Aid.

 

 
Home | Loans | Scholarships | Savings | Military Aid | Other Types of Aid | Financial Aid Applications
Answering Your Questions | Calculators | Beyond Financial Aid | Site Map | About FinAid®
Copyright © 2014 by FinAid Page, LLC. All rights reserved.
Mark Kantrowitz, Publisher
www.FinAid.org