Must a Trust Fund be Reported on the FAFSA Even If Access to the Trust is Restricted?

Must a Trust Fund be Reported on the FAFSA Even If Access to the Trust is Restricted?

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

turns 21.

— 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, UGMA

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.

Source: Fastweb

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