Trust Funds and Financial Aid - Finaid (2024)

Most trust funds are not effective means of sheltering moneyfrom the financial aid process and often backfire on the family. Almost alltrust funds are counted in the financial aid process, often as an asset of thechild. This leads to a high impact on eligibility for need-based financial aid.If the trust fund document restricted the beneficiary’s access to theprincipal, the trust fund will affect aid eligibility every year. The onlysituations in which a trust fund would not be counted during the financial aidprocess are as follows: An involuntary trust established by a court or wherethe use of the trust has been restricted by court order, such as a trust fundto pay future medical expenses of an accident victim. A trust whose ownershipis being legally contested and for which access to the trust is frozen by thecourt. This most often happens in divorce cases. Section 529 prepaid tuitionplans. As a general rule, voluntary restrictions on a trust, such as restrictedaccess to the trust, do not prevent it from being counted during the financialaid process. Such a trust is reported in the same manner as if there were norestrictions. The basic principle is that a voluntary agreement between twoparties cannot be binding on a third party. For example, prenuptial agreementshave no impact on the financial aid process. If the custodial parent remarries,the new spouse’s finances must be included on the FAFSA, notwithstanding anyprenuptial agreements to the contrary. Determining who should report the trustfund as an asset is often straightforward: If the trust fund is in the name ofthe student, spouse, or parent, then it should be reported as that person’sasset 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 isdedicated to paying for the beneficiary’s education, it should be reported asan asset of the beneficiary. If a trust does not pay its own taxes, follow themoney. The individual who pays taxes on the trust’s income is often the ownerof the trust. If the trust is owned by more than one individual, each ownerreports only the part he or she owns. If the trust does not specify thepercentage ownership of each individual, then ownership is divided equally bythe number of owners. Some trusts assign ownership of the income and assets todifferent individuals. In that case, the value of the ownership rights is morecomplicated.

If you own the income, you must report the current year’sincome as income on the FAFSA, and your right to future income from the trustas an asset. You must report the future income as an asset even if itaccumulates in the trust and you won’t receive it until a future date. Thevalue of the future income is not the sum of the future payments, but ratherthe sum of the net present value of those payments. The net present value isthe amount a third party would pay now to receive the future income. This is typicallythe current cost of an annuity or a set of zero coupon bonds that would providethe future income stream. The trust officer or the bank or brokerage thatmanages the trust can calculate the present value for you. Likewise, if youwill receive the trust principal at a future date, you must count the netpresent value of the trust principal as an asset. The sum of the present valueof the future income and the present value of the future receipt of principalequals the current value of the principal. Often it is easier to calculate thepresent value of the future receipt of principal and subtract that from thecurrent principal amount than to calculate the present value of the futureincome directly. This method of valuation is similar to the methods lotteriesuse to calculate the lump sum equivalent of a prize.

Finaid includes a Net Present Value calculator that may behelpful in assigning a value to the income and principal of a trust. Only thenet value of the trust is reported. Any debts against the trust are subtractedfrom its asset value before reporting. If ownership of a contested asset isresolved after the date the application is filed, the FAFSA is not updated. Theasset will, however, be reported on subsequent years’ financial aid applications.If a trust restricts access to the principal, consider hiring an attorney. Inmany states the courts can liquidate a trust to pay for medical or educationalexpenses. Blind trusts, when set up on a voluntary basis, do not shelter theassets from the need analysis process. The terms of a blind trust prohibit thetrustee from revealing the individual investments to the beneficiary. They donot, however, prevent the trustee from reporting the total asset value to thefamily (or directly to the financial aid administrator).