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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:

  • An involuntary trust established by a court or where the use of the trust has been restricted by court order, such as a trust fund to pay future medical expenses of an accident victim.
  • A trust whose ownership is being legally contested and for which access to the trust is frozen by the court. This most often happens in divorce cases.
  • Section 529 prepaid tuition plans.

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 fund is in the name of the student, spouse, or parent, then it should be reported as that person's asset on the FAFSA.
  • If the trustee has the authority to change the beneficiary, then the trust may be reported as an asset of the trustee.
  • If a trust is dedicated to paying for the beneficiary's education, it should be reported as an asset of the beneficiary.
  • If a trust does not pay its own taxes, follow the money. The individual who pays taxes on the trust's income is often the owner of the trust.

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 complicated.

  • If you own the income, you must report the current year's income as income on the FAFSA, and your right to future income from the trust as an asset. You must report the future income as an asset even if it accumulates in the trust and you won't receive it until a future date. The value of the future income is not the sum of the future payments, but rather the sum of the net present value of those payments. The net present value is the amount a third party would pay now to receive the future income. This is typically the current cost of an annuity or a set of zero coupon bonds that would provide the future income stream. The trust officer or the bank or brokerage that manages the trust can calculate the present value for you.
  • Likewise, if you will receive the trust principal at a future date, you must count the net present value of the trust principal as an asset.
  • The sum of the present value of the future income and the present value of the future receipt of principal equals the current value of the principal. Often it is easier to calculate the present value of the future receipt of principal and subtract that from the current principal amount than to calculate the present value of the future income directly.

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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