Trust Funds and Financial Aid
Most trust funds are not effective means of sheltering money from the financial aid process and often backfire on the family. Almost all trust funds are counted in the financial aid process, often as an asset of the child. This leads to a high impact on eligibility for need-based financial aid. If the trust fund document restricted the beneficiary's access to the principal, the trust fund will affect aid eligibility every year.
The only situations in which a trust fund would not be counted during the financial aid process are as follows:
As a general rule, voluntary restrictions on a trust, such as restricted access to the trust, do not prevent it from being counted during the financial aid process. Such a trust is reported in the same manner as if there were no restrictions.
The basic principle is that a voluntary agreement between two parties cannot be binding on a third party. For example, prenuptial agreements have no impact on the financial aid process. If the custodial parent remarries, the new spouse's finances must be included on the FAFSA, notwithstanding any prenuptial agreements to the contrary.
Determining who should report the trust fund as an asset is often straightforward:
If the trust is owned by more than one individual, each owner reports only the part he or she owns. If the trust does not specify the percentage ownership of each individual, then ownership is divided equally by the number of owners.
Some trusts assign ownership of the income and assets to different
individuals. In that case, the value of the ownership rights is more
This method of valuation is similar to the methods lotteries use to calculate the lump sum equivalent of a prize.
FinAid includes a Net Present Value calculator that may be helpful in assigning a value to the income and principal of a trust. Only the net value of the trust is reported. Any debts against the trust are subtracted from its asset value before reporting.
If ownership of a contested asset is resolved after the date the application is filed, the FAFSA is not updated. The asset will, however, be reported on subsequent years' financial aid applications.
If a trust restricts access to the principal, consider hiring an attorney. In many states the courts can liquidate a trust to pay for medical or educational expenses.
Blind trusts, when set up on a voluntary basis, do not shelter the assets from the need analysis process. The terms of a blind trust prohibit the trustee from revealing the individual investments to the beneficiary. They do not, however, prevent the trustee from reporting the total asset value to the family (or directly to the financial aid administrator).
Please refer to the account ownership page for information on the financial aid treatment of specific types of trusts often used for college savings.
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