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
— 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
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.
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
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
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.