Each of my parents left me a trust. From each trust I am entitled to the interest income and $5,000 annually. The remainder of the principal stays in the trusts until I die. The trusts then terminate, and the remaining principal is distributed to my son. My son is the one going to college, by the way. This skews my EFC to around 45% of the AGI for my wife and me. Is there anything that can be done about this? — Robert R. Trust funds must be reported as an asset on the FAFSA even if access to the trust is restricted. Voluntary restrictions placed on access to a trust do not affect the requirement to report the value of the trust on the FAFSA. A trust fund may be excluded from the FAFSA only when access to the trust was involuntarily restricted by court order, such as a trust fund established to pay future medical expenses of an accident victim. When the rights to the principal and the income from the trust are split, each beneficiary reports as an asset the net present value of the future cash flows the beneficiary will receive from the trust. The trust administrator can help you with this calculation. The net present value is the amount a disinterested third party would be willing to pay in exchange for the future cash flows from the trust. For example, assuming a 5% discount rate, a $10,000 payment 10 years from now would be worth $6,139 now. (If you were to invest $6,139 in a tax-free account earning 5% interest and reinvested the interest, the principal balance would reach $10,000 in 10 years.) When there are multiple future payments, the net present value of each payment is calculated separately and the results are added together. For example, a $1,000 annual payment for 10 years would have a net present value of $7,722. The first payment has a net present value of $952, the second payment has a net present value of $907, and so on, until the tenth payment has a net present value of $614. The net present value of these payments sum to $7,722. Trust funds are often reported incorrectly on the FAFSA. The most common error involves summing all the future payments without discounting them to calculate the present value. This overstates the asset's value. Another common error involves a failure to handle split interests correctly, usually by reporting the current principal balance as an asset of only one beneficiary, even though that beneficiary may have the right to only the income or only the principal. As a general rule of thumb, the sum of the net present value figures for all the beneficiaries of the trust should equal the current principal balance of the trust. Unfortunately, voluntary restrictions on access to a trust often hurt the trust's beneficiaries because they must report the trust as an asset even though they cannot liquidate the asset. The applicant can ask the college to use professional judgment to disregard the trust's value as an asset, but most colleges will not make such an adjustment unless there is something unusual about the trust or the family's financial circumstances (e.g., the beneficiary relies on the trust fund for disability-related expenses). There are, however, a few options. Disputed Ownership. If ownership of the trust is in dispute (e.g., the trust was established by a will which is currently being contested), the trust's value is not reported on the FAFSA until ownership of the trust is resolved. Simplified Needs Test. The simplified needs test causes all assets to be ignored on the FAFSA, including trust funds. To qualify for the simplified needs test, a dependent student's parents must have adjusted gross income less than $50,000 and be eligible to file an IRS Form 1040A or 1040EZ (or satisfy certain other eligibility criteria). Breaking the Trust. The trust document should be reviewed carefully, since some trust funds allow for principal distributions for the education and medical care of the beneficiary or the beneficiary's dependents. State law may also provide some flexibility in the use of trust funds for such circumstances, notwithstanding any restrictions in the trust document. But trust documents usually allow the trustee to use the trust funds to defend against lawsuits, which can be expensive, so such modifications are only practical with the cooperation of the trustee. Factoring. Factoring involves selling the rights to periodic payments from a trust fund or structured settlement in exchange for an up-front lump sum payment. The Internal Revenue Code (26 USC 5891) requires all factoring arrangements to be approved by a state court which must find that the arrangement is in the best interest of the seller and the seller's dependents. Consult a qualified attorney before considering either breaking the trust or engaging in a factoring arrangement.