I have a friend whose mother passed away two years ago, and left her
some money from an insurance policy. The money is currently in trust
for her with her grandmother as the trustee. Does she need to claim
this as an asset on her FAFSA? She is unable to touch it until she
— Karen A.
In most cases the beneficiary of a trust must report the trust as an
asset on the Free Application for Federal Student Aid (FAFSA). The
FAFSA instructions, for example, state that "Investments include real
estate (do not include the home you live in), trust funds
and UTMA accounts, money market funds, mutual funds, certificates of
deposit, stocks, stock options, bonds, other securities, installment
and land sale contracts (including mortgages held), commodities, etc."
The beneficiary must report the trust as an asset even if the
beneficiary's access to the trust has been restricted. The only
exception is when the restrictions on access to the trust are
involuntary, such as a trust that is restricted by court order. Such a trust would not be reported as
an asset on the FAFSA. All other trust funds must be reported as an
asset on the FAFSA.
If the creator of a trust placed restrictions on access to the trust
by the beneficiary, such restrictions are considered voluntary. The
restrictions may be involuntary from the perspective of the
beneficiary, but the restrictions were established voluntarily when
the donor created the trust. Examples of trusts with voluntary
restrictions on access to the trust include a Crummey Trust and a
Section 2503(c) Minor's Trust.
After all, if people could shelter money from need analysis simply by
placing voluntary restrictions on access to the money, the need
analysis process would be ineffective at assessing the family's
ability to pay. A trust is still a source of financial strength,
regardless of whether access to the trust is restricted or not.
Unfortunately, restrictions on access to the trust can backfire,
reducing or eliminating the student's eligibility for need-based
financial aid. An asset in the student's name will reduce eligibility
for need-based aid by 20% of the value of the trust. Moreover, since
the beneficiary cannot liquidate the trust, the trust will continue in
existence, affecting eligibility for need-based aid every year.
However, sometimes trusts aren't as restricted as one might
believe. The trust document may allow the trustee to spend the money
for the benefit of the beneficiary. Some states have laws that allow
trustees to spend trust funds for the medical care and education of
the beneficiary even if access to the trust is restricted.