The Intersection of Inheritance and Financial Aid

Assisting a child or grandchild in paying for his or her college education is one of the greatest gifts that can be given through estate planning. This is often accomplished through creating a 529 college savings plan or trust account. As with all estate planning maneuvers, however, these actions do not come without potential consequences. A recent article discusses how 529 college savings plans and educational trust accounts can impact a student’s eligibility for financial aid.

Where the owner of a 529 account is not the student or the student’s parent, the school will consider the funds in the account when considering the student’s eligibility for financial aid. This may become problematic if the account owner refuses to immediately release the funds.

The easiest way for the beneficiary of a 529 college savings plan to avoid this fate – if the account owner refuses to release the funds – is to ask the account owner to change the beneficiary to a family member of the current beneficiary. Down the road, the account owner can change the beneficiary back to the original beneficiary. Conversely, if the student or the student’s parent owns the 529 account, it will not be considered to be income on the Free Application for Federal Student Aid.

Distributions from a trust account are always considered to be either income (if taxable) or untaxed income (if not taxable). These distributions count against financial aid eligibility. The same is true for an outright gift to a student.


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