Balancing tax strategies and beneficiaries' interests
Unintended Consequences Lie Within the Details able estate while passing on as much income or property to the intended donee as possible. High-net-worth individuals often make annual gifts of $11.000 and pay a beneficiary's tuition directly as a means of transferring property tax free. Because these strategies run counter to asset and income planning strategics used to maximize student financial aid, they have hidden consequences for the donee. The authors explain the financial aid system, specifically the asset and income tests, and how it punishes those who use Common estate tax planning tools and techniques. It is important to ascertain if student financial aid may be a factor and consider the overall effect of both estate planning and student financial aid on both the donors and the student donee. The financial aid regulations (Title IV are no less complicated than the IRS regulations. There are complex formulas, unfamiliar terms, esoteric definitions, and difficult calculations, many of which can become moving targets because financial aid officers (FAO) at both public and private education institutions can exercise professional judgment, which gives them broad authority to interpret the financial aid laws and regulations and distribute financial aid funds as they deem appropriate.
To complicate the college financial aid process, some private colleges use different rules than most public colleges. Individuals applying to both must consider two different sets of complicated, fluid rules to determine their eligibility for financial aid funds.
Financial Aid There are two types of financial aid: self-help aid (loans and work-study) and gift aid (grants and scholarships). The type and amount of aid is based on two factors: merit and need. For the sake of simplicity, this article will only address need-based aid.
The process for determining a student's need is called a needs analysis. It takes into account the cost of attending the school, the income and assets to be contributed by the student's family, and the income and assets to be contributed by the student. For example: IMAGE FORMULA9As a student's adjusted financial need rises, so does financial aid eligibility. If the student's resources or the expected family contribution (EFC), increases, the adjusted financial need (AFN) decreases and the student receives less financial aid.
The cost of attendance (COA) is calculated by the school, and will vary. The EFC is the sum of a portion of the parents' income and assets added to a portion of the student's income and assets. Student resources include such things as scholarships and grants, cash gifts of tuition payment paid directly to the school, and prepaid tuition plans.
The EFC is calculated in two different ways: using the federal methodology (FM) or the institutional methodology (IM). Most state or public schools use FM, while most private schools use IM. Both measures have two components: income and assets. The income and assets of the student receive a higher factor of contribution than the income and assets of the parents.
The FM method for measuring EFC is the sum of the parents' contribution from income and assets, plus the student's contribution from income and assets. Both the IM and FM vary annually. The IM includes more assets than the FM, but also takes into account extraordinary medical expenses and private elementary, middle, and high school tuition costs. The IM typically produces a higher EFC than does the FM.
Under the 2002/03 EFC formula, the parents' available income is calculated by adding the parents' adjusted gross income (AGI) to their untaxed income and benefits, less taxes (federal, state, and FICA), employment expenses (up to $3,000), and living allowances, which increases as the number of individuals in the household and in college increases (see Exhibit 1). …