You've worked hard to build a legacy for your children, including setting aside funds to help them achieve their educational dreams. But you've heard concerning stories about how inheritances can derail financial aid eligibility, potentially limiting their choices. This common worry keeps many parents awake at night as they try to balance providing for their children's future while preserving their access to educational opportunities.
Mark Ignacio, a San Diego estate attorney, is also a father and fully understands your concerns. He’s dedicated to helping families create strategic estate plans that help children maintain their inheritance for future security while still advancing their higher education. Let's explore how inheritances impact college financial aid and what steps you can take to maximize all available resources.
Understanding How Inheritances Affect Financial Aid Calculations
When students apply for financial aid using the Free Application for Federal Student Aid (FAFSA), they must report assets and income. An inheritance received before or during college might greatly impact aid eligibility since the federal formula expects students to contribute 20% of their assets toward education costs.
For instance, if a student receives a $100,000 inheritance, it could reduce need-based aid by approximately $20,000. This reduction occurs because the FAFSA considers inherited assets as available resources for funding education, regardless of the student's intentions for those funds.
It's important to note that parental assets are assessed differently. Parental assets are typically factored into the aid calculation at a maximum rate of 5.64%, which is significantly lower than the 20% rate applied to student assets.
Therefore, how an inheritance is managed—whether it's held in your student's name or your name—could substantially affect financial aid eligibility.
Strategic Trust Planning Helps Preserve Aid Eligibility
One recommendation Mark might encourage you to consider includes certain types of trusts to shield inherited assets from financial aid calculations. As an essential estate planning document, a properly structured trust can hold the inheritance while maintaining eligibility for need-based assistance.
The trust should include specific language about educational support that aligns with financial aid rules. This might include provisions for the trust to cover certain expenses directly rather than distributing funds to the student, which could affect aid calculations.
Timing Distributions to Maximize Educational Benefits
Creating the right trust structure is only half the equation. When your child receives inherited assets matters just as much as how they receive them.
Financial aid offices generally look at the previous two years' worth of income and assets when determining aid eligibility, creating what's known as the "base year" for calculations—usually your child’s sophomore and junior years in high school. Poor timing of inheritance distributions could unnecessarily reduce aid awards by thousands of dollars each college semester.
As another example, if your child receives a large distribution during their sophomore year of college, it could impact aid eligibility for both junior and senior years. However, the same distribution received after college graduation would have no effect on undergraduate financial aid.
So we might want to consider:
- Delaying distributions until after graduation.
- Structuring smaller distributions that stay below aid threshold limits.
- Coordinating distributions with other financial aid deadlines.
The financial aid timeline also intersects with important decisions about graduate school, study abroad programs, and other educational opportunities that may arise. So, you and Mark will work together on a detailed distribution schedule to help preserve these options as well.
Creating Education-Focused Estate Plans
Building generational wealth isn't just about passing down assets—it's about empowering your children to achieve their dreams. When crafting an estate plan with education in mind, you need more than just a basic will and trust. You need a dynamic strategy that can adapt to changing educational landscapes, from rising college costs to emerging career paths that may require additional schooling.
Think beyond the traditional four-year degree. Your child might pursue advanced schooling, study internationally, or need specialized training for their chosen career. Perhaps they'll want to start a business after graduation or combine work with continued education. A well-designed estate plan should provide flexibility for all these possibilities while maintaining access to financial aid resources.
Mark Ignacio will help you develop provisions in an education-focused estate plan that protects your child’s inheritance and allows for all financial assistance such as:
- Current and future education costs
- Multiple children's needs
- Different types of financial aid
- Various educational paths
- Emergency funding options
- Graduate school possibilities
With a foundation rooted in faith-based Christian values, Mark can help you create a legacy for your family that reflects the 3 Ts of stewardship—time, talent, and treasure.
