Estate Planning Meets FAFSA: Smart Strategies for Asset Ownership

by Tara Cheever ~ Attorney at Law December 31, 2024 Asset Protection, Estate Planning, Trusts, Wills

Estate Planning Meets FAFSA: Smart Strategies for Asset Ownership

Preparing for college expenses is a big milestone, and understanding how financial aid and estate planning intersect can make a world of difference. Strategic asset ownership not only helps maximize financial aid eligibility but also ensures your wealth is preserved for future generations. Let’s dive into how FAFSA evaluates assets, the estate planning tools available to protect your finances, and the steps you can take now to optimize your family’s education funding strategy.

FAFSA and Asset Ownership: The Basics

The Free Application for Federal Student Aid (FAFSA) determines financial aid eligibility based on family income and assets. However, not all assets are treated equally. How assets are owned – whether by the parent, student, or even a third party – can significantly impact the Expected Family Contribution (EFC).

  • Parent-Owned Assets: FAFSA assesses up to 5.64% of parent-owned assets, such as savings accounts, investments, and 529 plans.
  • Student-Owned Assets: FAFSA is much tougher on student-owned assets, assessing 20% of their value. For instance, a $10,000 custodial account in the student’s name could reduce financial aid eligibility by $2,000.
  • Third-Party-Owned Assets: Assets owned by others, like a grandparent’s 529 plan, are not initially included in FAFSA calculations. However, distributions from these accounts are treated as student income and assessed at 50%the following year.

Strategies to Optimize Financial Aid

Understanding these rules is key to structuring your assets to reduce their impact on financial aid eligibility. Here are some smart strategies:

  1. Shift Savings to FAFSA-Friendly Accounts
    For future savings, prioritize 529 college savings plans owned by parents instead of custodial accounts like UGMA/UTMA.
  2. Leverage Retirement Accounts
    Retirement accounts, such as 401(k)s, IRAs, and Roth IRAs, are not counted by FAFSA. Contributing to these accounts can reduce your reportable assets while benefiting your future.
  3. Pay Down Debt
    Liquid assets that count toward FAFSA calculations can be used to pay off non-reportable debt, such as mortgages or student loans.
  4. Time Your Financial Moves
    FAFSA captures your financial status as of the day you file. Plan big financial transactions, like selling investments or receiving bonuses, for after your FAFSA filing date to avoid inflating your assets or income.
  5. Be Strategic with Trusts
    While irrevocable trusts can help protect your wealth, they may still impact FAFSA if the student or parent is a beneficiary. Use trusts carefully and consult with a professional to ensure they align with your goals.

Estate Planning Meets FAFSA: Tools for Success

Estate planning is not just about protecting wealth – it’s also about positioning your family for financial aid eligibility. Here’s how estate planning can help:

  • Irrevocable Trusts: These can shelter assets from estate taxes but must be structured carefully to avoid negatively impacting FAFSA calculations.
  • 529 Plans: Owned by parents, these plans are one of the most FAFSA-friendly ways to save for college.
  • Life & Legacy Plans: A comprehensive plan can coordinate your education funding goals with long-term wealth preservation strategies.

Practical Steps to Take Now

Ready to take control of your financial aid strategy? Start with these actionable steps:

  1. Review and Categorize Your Assets: Understand how your assets are owned and how they impact FAFSA.
  2. Shift to FAFSA-Friendly Accounts: Use 529 plans and retirement accounts for future savings.
  3. Maximize Retirement Contributions: Reduce countable assets while securing your financial future.
  4. Pay Off Debt: Use liquid assets to eliminate non-reportable debts like mortgages.
  5. Create a Life & Legacy Plan: Work with Cheever Law to develop a strategy that balances education funding with long-term wealth preservation.

The Big Picture

Balancing estate planning with FAFSA eligibility can feel challenging, but it’s an essential part of preparing for your child’s future. By understanding how assets are evaluated and making strategic financial moves, you can position your family for success – both in receiving financial aid and preserving your wealth.

At Cheever Law, we specialize in helping families create comprehensive strategies that align education funding with estate planning goals. Schedule a Life and Legacy Planning Session today, and let’s build a plan that supports your family’s success now and for generations to come.