Windfall income and college EFC

[Matryoshka]

This post is going to be a bit all over the place, I apologize in advance.  "Windfall" income is not right, but I'm not sure how else to phrase it, if someone can help me with a more correct term, please do and I'll change it.

 

I'm posting this for a friend.  Her 14yo dd has just been diagnosed with a condition that will need multiple lifelong medications, if it isn't terminal (if anyone's the praying sort, please do - I'm not going to go into details here because I'm trying to get to the point of the post..)  There will be ongoing, probably huge medical expenses for years; the family does not have a very big income to begin with, and they also have twin juniors in high school.  She has set up one of those online donation sites to help defray the expenses.  When she mentioned this, I thought of the poster here who just got a settlement from an injury lawsuit, and it made the family income look higher and ended up making their EFC way higher (am I remembering that correctly), and that it didn't seem to matter to the colleges that the money was supposed to pay for future medical bills?

 

Anyway, I mentioned she might have to think about that with two kids going to college in another year; that the colleges might want a piece of any donations (they seem rather shameless this way...).  She thought since the money was earmarked as donations for medical expenses and would be paid right back out, it wouldn't matter, but I have a bad feeling it might.  I was asking her how I could help her family, and she asked me to research this and also some medical stuff online, so that's why I'm posting this...  I figured the Hive knows more than random Googling - I'm not even sure what I'd Google for...

 

So, is there any way for her to handle this kind of donated money upfront so that the FAFSA doesn't think they've got way more 'income' than they do?  Or is there some provision for medical bills so that it won't make a difference?  Or will she just have to contest all the financial aid packages she gets?

[regentrude]

Can she establish a trust fund and get a court to order that the funds are restricted to be used for medical expenses?

This is what I found: http://www.finaid.org/savings/trustfunds.phtml

 

The only situations in which a trust fund would not be counted during the financial aid process are as follows:

• An involuntary trust established by a court or where the use of the trust has been restricted by court order, such as a trust fund to pay future medical expenses of an accident victim.
• A trust whose ownership is being legally contested and for which access to the trust is frozen by the court. This most often happens in divorce cases.
• Section 529 prepaid tuition plans.

 

A voluntary restriction is not binding. She should consult a lawyer.

 

Alternatively, I would look into HSAs. It seems this would shelter the asset; however, contributions count as income, so this may not be good either.

 

 

 

Health savings accounts
Health savings accounts (HSAs) resemble
tax-deferred pension and savings
plans more than flexible spending arrangements;
for example, the balance in
an HSA persists from year to year, while
that in a flexible spending arrangement
must be spent on qualified expenses by
the end of the year. Therefore, treat taxfree
contributions to an HSA as untaxed
income; these will appear on line 25 of
the 2011 IRS Form 1040. The balance in
the account does not count as an asset,
nor would distributions from it count
as untaxed income when they are used
for qualified medical expenses. Distributions
not used for qualified expenses
are subject to income tax (and a possible
penalty) and will be counted in the
adjusted gross income

 

http://ifap.ed.gov/fsahandbook/attachments/1213AVGCh2.pdf

Edited March 24, 2016 by regentrude

[regentrude]

Putting the money in a trust fund was my first thought.

 

But it has to be involuntarily restricted. Otherwise, trust funds count as assets.

[Pegasus]

The money will count against them but high medical bills IS a "special circumstance" that merits a review.  In other words, they'll need to be honest and claim the money on the FAFSA and CSS profile but then notify the schools of interest of their circumstances. They schools then have the option to provide further review and make a professional judgement adjustment.

[KJB]

Can the money be donated to and put in the name of the child who will receive the benefit from the money? In other words, if it's the child's income, it should not be counted against the parents. They won't have to claim it if it's not theirs....

[EndOfOrdinary]

If I correctly remember our accountant telling us, you can gift another person or child 14,000 dollars a year tax free. In this way, what if she gifted the money to the daughter?

 

Now, I must say, we have never been in a place where gifting thousands of dollars was really an issue. So I am no where near anything of an expert (or ven vy qualified to comment). This discussion came up with my Dh's mother having Alzheimers and us not wanting to jump a huge tax bracket with inheritance. The accountant was taking about ways that people make money "disappear."

 

Setting up an IRA for a minor is another way to remove large amounts of income from your paperwork. I do not know if that even matters in this instance.

[Matryoshka]

Can the money be donated to and put in the name of the child who will receive the benefit from the money? In other words, if it's the child's income, it should not be counted against the parents. They won't have to claim it if it's not theirs....

 

This would actually be worse.  The colleges only expect like 5% of the parents' savings to be available to pay for college (per year, that is).  But they want pretty much everything that's in the child's name.  Never put anything in a child's name if you don't want the colleges just taking it all.

 

If I correctly remember our accountant telling us, you can gift another person or child 14,000 dollars a year tax free. In this way, what if she gifted the money to the daughter?

 

Now, I must say, we have never been in a place where gifting thousands of dollars was really an issue. So I am no where near anything of an expert (or ven vy qualified to comment). This discussion came up with my Dh's mother having Alzheimers and us not wanting to jump a huge tax bracket with inheritance. The accountant was taking about ways that people make money "disappear."

 

Setting up an IRA for a minor is another way to remove large amounts of income from your paperwork. I do not know if that even matters in this instance.

 

I should ask if they have an HSA.  If they did, that would be a good way to keep it off the books and for medical expenses.  Not everyone has those, though, and I think it's up to the employer-picked health plan as to whether you have access to one.

 

Whether or not the money is a gift or not is not the issue - it will be seen as income, and the colleges will want their (quite hefty) share, taxed or not.

Edited April 2, 2016 by Matryoshka

[KJB]

This would actually be worse.  The colleges only expect like 5% of the parents' savings to be available to pay for college (per year, that is).  But they want pretty much everything that's in the child's name.  Never put anything in a child's name if you don't want the colleges just taking it all.

 

 

I should ask if they have an HSA.  If they did, that would be a good way to keep it off the books and for medical expenses.  Not everyone has those, though, and I think it's up to the employer-picked health plan as to whether you have access to one.

 

Whether or not the money is a gift or not is not the issue - it will be seen as income, and the colleges will want their (quite hefty) share, taxed or not.

 

I misunderstood. I thought the issue was income counting against the family for the two older children's upcoming university educations. As you mention, the income would count against the 14 year old, but if it belonged to her it wouldn't count against the family for the other children. 

 

Also, it sounds as if the money will be spent over the next few years which will lessen the amount she'll have to claim by the time she is old enough to attend college.

 

Just a few thoughts I'd have if it were my family. Obviously, a very tough situation. 

 

So sorry for your friend's family. I will definitely say a prayer for them. 

[maize]

a trust fund may be the best bet.

[Matryoshka]

I misunderstood. I thought the issue was income counting against the family for the two older children's upcoming university educations. As you mention, the income would count against the 14 year old, but if it belonged to her it wouldn't count against the family for the other children. 

 

Also, it sounds as if the money will be spent over the next few years which will lessen the amount she'll have to claim by the time she is old enough to attend college.

 

Just a few thoughts I'd have if it were my family. Obviously, a very tough situation. 

 

Oh, you're right.  Apparently my subconscious is very hopeful she'll recover fully and go on to college. :)   But you're also right that by then they would have spent most of the fund - and if not, they'll probably be so happy she's well again that extra money will be the least of their worries.

 

So sorry for your friend's family. I will definitely say a prayer for them. 

 

 

Thank you.  She has gotten through the first round of chemo well, but there will be a long road ahead. 

[Matryoshka]

I thought of one more question - if they put the money in the sick dd's name, what would be the best way to do that?  They would still have to access it themselves to be able to pay her bills.  If their names were also on the account, would they still have to report that income to colleges?  If it's a trust fund in her name, would the parents still have access to the funds to be able to pay her bills from it?

 

[maize]

A simpler idea might be to put the money in a grandparent's name but only if there is zero risk of it being misused. I could totally trust my parents or inlaws but I know many cannot.

[maize]

I thought of one more question - if they put the money in the sick dd's name, what would be the best way to do that? They would still have to access it themselves to be able to pay her bills. If their names were also on the account, would they still have to report that income to colleges? If it's a trust fund in her name, would the parents still have access to the funds to be able to pay her bills from it?

The parents could probably be the trustees and have access, but the money wouldn't be reportable as theirs.

[KJB]

The parents could probably be the trustees and have access, but the money wouldn't be reportable as theirs.

 

I would have the donations made or transferred directly to a checking account held in the minor daughter's name. The parent's would probably have to be on the account but the income would be the child's. Then I would have a debit/credit card connected to the account used to pay medical bills. 

 

I would be clear on the donation website that the money is going to the child to pay for medical and related expenses.

 

And then, I'd make sure to keep receipts for the child's related expenses, which of course could include expenses outside direct hospital bills.

 

If the sum is large enough (or frankly, even if it's not), the child could put some of the money into a 529 plan for later if it is expected she'll use it for educational expenses. And if that's the case, I think that could be stated on the donation website as well.

 

Extra prayers for them today.