Trust Funds on the FAFSA

on March 1, 2017

Trust funds generally are not an effective means of sheltering assets on the Free Application for Federal Student Aid (FAFSA).

 

Trust Funds Reported as Assets on the FAFSA

 

Most trust funds must be reported as an asset on the FAFSA, even if there are restrictions on access to the trust. For example, trust funds where the grantor of the trust placed a voluntary restriction on access to the trust must be reported as an asset on the FAFSA, even if the restriction is involuntary from the perspective of the beneficiary.

 

Examples of reportable trusts include life estates, revocable trusts, Crummey Trusts and Section 2503(c) Minor’s Trusts.

 

When a trust fund has more than one beneficiary, each beneficiary reports his or her share of the net worth of the trust as an asset on the FAFSA.

 

Trust funds almost always backfire, since they must be reported as assets on the FAFSA, but the restrictions on access to the trust prevent the beneficiary from liquidating the trust to pay for college. This causes the trust fund to reduce the student’s eligibility for need-based financial aid each and every year.

 

Trust Funds that are Not Reported as Assets on the FAFSA

 

The only trust funds that are not reported as assets on the FAFSA are:

  • Trust funds that are involuntarily restricted by court order, such as a court-ordered trust to pay for future medical expenses of an accident victim
     
  • Trust funds where the beneficiary’s right to the trust has not yet been determined, such as testamentary trusts where the estate has not yet been settled or where the will is being contested in court

Splitting Income and Principal

 

Some trust funds split ownership of the income from the trust and the principal balance of the trust. Determining the value of such split ownership requires the use of a net present value calculation (NPV). A NPV calculation discounts future cash flow back to the present using a discount rate, such as a risk-free rate of return or inflation rate. The sum of the NPV of the trust income and the NPV of the trust principal should equal the present value of the trust fund.

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