Impact of a Gift Trust Account on Eligibility for Need-Based Financial Aid
September 10, 2012
My daughter turned 18 recently, and received a $25,000 mutual fund statement with her name on it. Her aunt had put $10,000 away in 1995 in a gift trust account for a minor. This was a mutual fund account in which the interest was reinvested each year and therefore no IRS interest statements were generated. We were unaware that her aunt had opened this account and let the money grow for 17 years. My daughter will be applying for financial aid for her sophomore year in college and must fill out the FAFSA and CSS Financial Aid PROFILE forms. How will this $25,000 mutual fund affect her financial aid for next year? She does not have any assets and works a part time job for income. What is the smart thing to do in reducing the affect of this asset for financial aid? Can she put the mutual fund in my name? I do not not own a home due to a recent foreclosure and do not have much assets. — A.K.C.
A gift trust account is an irrevocable trust fund. It is structured so that the amount contributed to the trust by the trust’s creator is not subject to gift or estate taxes. To qualify, the gift must be irrevocable, meaning that the creator cannot change his or her mind about the gift or change the beneficiaries. The amount contributed must fall under the annual gift tax exclusion at the time of contribution. The trust terminates at a future date or when conditions specified in the trust document are satisfied, such as when the beneficiary reaches the age of majority, at which time the beneficiary will receive the gift trust account.
In addition, the contributions to the gift trust account must represent a present interest to the beneficiary, not a future interest. This means that the beneficiary must have been able to withdraw the funds from the account. As with a Crummey trust, the beneficiary should have been informed about the contribution to the trust at the time of the gift and then had the opportunity to withdraw funds for a limited period of time, typically 30 days.
But since the beneficiary was a minor at the time, the minor’s interest in the gift trust account would have been structured as a custodial account. The notice of the gift would have been provided to a custodian on behalf of the minor. It is likely that the creator of the trust also served as the custodian.
This is a clever way of giving money to a minor in a tax-advantaged manner that precludes the child’s parents from having access to the funds. It also protects the money from the parent’s creditors.
If the student and parents are unaware of the existence of a gift trust account, they have no obligation to report it as an asset on the Free Application for Federal Student Aid (FAFSA) or other financial aid forms. So the failure to report the gift trust account as an asset during the student’s freshman year, before she reached the age of majority, does not present a problem.