Making Gifts to Children
In the world of college financial aid, good estate planning strategies often result in less financial aid for your child or grandchild. For instance, a strategy included in many estate plans involves making annual tax-free gifts to children. In 2015, annual gifts can be made, up to $14,000, or $28,000 if the gift is split with your spouse to any number of individuals with no gift tax consequences (unchanged from 2014). Once the gift is made, the assets are removed from your taxable estate and any income on the gifts is taxable to the recipient.
Certain assets are excluded when calculating your expected family contribution, such as retirement funds and annuities.
The problem results from how assets are treated for financial aid purposes. To determine a financial aid amount, a college takes the cost of attending that school and subtracts your expected family contribution (EFC).
When calculating the EFC, a college generally considers your income and assets, as well as your child’s income and assets. Currently, a maximum of 5.6 percent of the parents’ assets and up to 47 percent of the parents’ income are included in the EFC, while 20 percent of the child’s assets and up to 50 percent of the child’s income are included.
The difference between 20 percent of the child’s assets and 5.6 percent of the parents’ assets can make a big difference in a financial aid award. For example, suppose you and your spouse have been making $10,000 gifts to your child for the past ten years, so your child now has $100,000 of assets. For financial aid purposes, your child will be expected to use $20,000 of those assets towards first-year college expenses. On the other hand, if you still owned the $100,000 in assets, you would only be expected to use a maximum of $5,600 toward first-year college costs, which means your child would be much more likely to receive financial aid.
So before starting an annual gifting program, consider the possible impact on financial aid calculations. Become familiar with financial aid formulas, roughly calculating what you could expect in terms of financial aid. You should also consider which college your child or grandchild is likely to attend. Nearly 30 elite colleges now only consider about 5 percent of both the parents’ and student’s assets in financial aid calculations (called the “Consensus Approach”). While the federal financial aid formula and other colleges have not yet followed, the calculations may change in the future.
If, after going through the calculations, you find you probably won’t be eligible for financial aid, you may decide to make annual gifts to your child. However, if the calculation indicates you may receive financial aid, you might want to hold off on an annual gifting program.