The College Financial Aid Gift That Keeps on Giving

In the financial aid formulas, students have no asset protection allowance and lose 20 cents per year for every dollar in their name. Appearing asset poor can significantly help make sending a student to the college of their choice a financial reality. Gifting is one of the few legal ways this can be accomplished.

Any student at least 18 years of age can legally gift any of their assets provided that no more than $12,000 (2008) is gifted to any one person in any given year. This legally reduces the student’s assets and gets them one step closer to being asset poor in the eyes of the financial aid calculators.

Adult students who have stocks, bonds, mutual funds, cash and the like, should gift relatives and friends. This should be done with the expressed stipulation that the money is to be gifted back upon request, or they will needlessly overpay for college.

Be aware that under no circumstances should the student gift parents or siblings, as the assets would then belong to another family member and still be subject to financial aid assessments. Anyone outside of the student’s immediate household is exempt from any financial aid assessments whatsoever, and only those trusted non-immediate family members or friends should be considered.

Let’s assume the student has $50,000 in cash and chooses to gift various relatives and/or close, trusted, family friends. It is highly suggested that the gift be invested or repositioned into a short-term CD or money market account, and titled as follows:

1. Joe Smith (relative of student), POD (Pay On Death), Tom Smith (student), $12,000.
2. Ann Smith (relative of student), POD, (Pay On Death) Tom Smith (student), $12,000.

In the above scenario, the student will have gifted $24,000 and will need three additional individuals to gift the balance of $26,000 ($12,000 + $12,000 + $2,000). If the student owns real property such as a condominium or land, it should be Quit Claimed and re-titled in the recipient’s name in shares that are worth no more than $12,000 each. Real property gifting is much more complex, but the net result is the same. A Quit Claim Deed is used rather than a Warranty Deed, as the person gifted knows the owner of the property, and no “warranty” of ownership is necessary. Now the student has reduced their assets, and in doing so qualifies for $10,000 in additional financial aid ($50,000 x 20%).

This strategy is not without a downside. Gifting can be risky as its success is completely dependent on the trustworthiness of the person receiving the gift. Once implemented, the student gives up all right and title, and the money or property is now owned by the person it was gifted to. However, when implemented cautiously, the benefits of gifting far outweigh the risks. Nonetheless, it is strongly advised that assets only be gifted to those whose integrity is beyond question.

As with any 18 year old, it is completely legal for any parent to gift anyone up to $12,000 per year. With parents, this strategy can be a bit more complicated, but it still works:

Assume a two parent family with a total of $55,000 in excess of the parent Asset Protection Allowance. If the student’s grandparents are all living, each parent gifts $12,000 to their father, and each gifts $12,000 to their mother ($12,000 x 4 = $48,000 total). Then one parent gifts $3,500 to their spouse’s father, and $3,500 to their spouse’s mother for a total of $55,000.

The grandparents then set up savings accounts for the student’s parents; the accounts to be titled “Pay On Death” (POD) or “In Trust For” (ITF). This will be a temporary holding place for the money during the college years. The funds will not be subject to any assessments as all of the money now belongs to the student’s grandparents.

When all financial aid forms have been completed, the grandparents close out the accounts and gift the money back to the parents. This can be repeated each year the student is in college. Thus $220,000 ($55,000 x 4) will have avoided assessments, saving more than $12,000 over four years!

Own a family business? Gifting works best in this situation when there are at least two family members who work in the business. If there are more, it can facilitate the end result. The main objective is to lower the family’s adjusted gross income (AGI) by approximately 30%. The lower the AGI, the more financial aid the family will be eligible for. Here’s how it works:

If the parent’s income is $100,000, the business pays $30,000 as a bonus, overtime or just additional income, to a trusted part-time or low salaried family member or adult relative who does not share the same address as the student. The family’s income is reduced by the same amount paid to this trusted family member, which results in a lower AGI, and less income tax!

In turn, the employee gifts each of the student’s parents $12,000. The remaining $6,000 will be gifted to someone else who in turn will gift it back to the parents. Reducing the AGI lowers the Expected Family Contribution (EFC) by as much as 47% of the total amount gifted! However, the student’s parents must reimburse the employee for all taxes incurred on the extra income received.

If this strategy is employed after January 1st of the senior year of high school, then during negotiations it must be mentioned that the family had an income reduction of whatever amount was paid to the above-mentioned employee. However, it is not necessary and not advisable to explain the details of the income reduction unless asked. A “cutback” will surely suffice as an answer to a curious financial aid officer (FAO).

Great care must be taken to insure that the gifting actually comes to fruition. Families must resist the temptation of reducing income to a point where it will appear insufficient to support the family. In these difficult economic times, virtually any FAO will show compassion to a family that has had a sudden loss of income.

Receiving child support? With the cooperation of the payer, payments can be gifted rather than paid as child support. Since it is not counted as taxable income, and there is no tax deduction as with alimony payments, the recipient (usually the custodial parent) can benefit from gifting. Here’s how it works:

Instead of making child support payments, the money is gifted. The result is that the recipient avoids any assessment on the gifted money in the financial aid formulas. This will result in savings of up to 47% on money that would otherwise have been assessed as child support payments received.

If the total annual child support payments are between $12,001 and $24,000, another individual will have to be gifted. Payments of up to $12,000 equal one gift. Payments from $12,001 to $24,000 will require two gifts. In return, the money is gifted back to the custodial parent via an adult student or whoever else was gifted, and the procedure can be repeated annually until child support payments cease.

The strategy of gifting is more difficult when there is more money involved, but if there are enough relatives or friends who can be trusted implicitly, families can legally deplete their asset or investment base and appear asset poor in the financial aid formulas. It is always recommended that you consult with your accountant, attorney or a financial aid professional, before implementing the gifting strategy.