How to give money to friends’ children without a college stealing it?

I am friendly with some¬†children (centered around age 10) whose parents are in poor health and at least one of whom probably won’t survive until the children are college age. I would like to give these kids some money but I am concerned that if I did it will simply be taken away from them roughly 1:1 by their college in the form of reduced financial aid.

This Yale article says that “Student assets are assessed in the financial aid formula at a much higher 20 percent rate…” Does that mean that over a four-year period, 80 percent of a child’s savings will be taken by the college in the form of reduced financial aid? So a child who takes my money and spends it all on a gap year Burning Man pavilion¬†will come out, after college, almost even with a child who saves the money until freshman year?

This article on grandparent-owned 529 accounts implies that funds in a 529 account owned by a non-relative would be safe if not tapped until senior year.

9 Comments

  1. Owen

    May 9, 2014 @ 1:39 am

    1

    So just hold on to the money yourself until it’s time to actually pay the bills. Maybe you could buy life insurance or add a codicil to your will if you’re afraid of not being around to pay bills yourself.

  2. mark

    May 9, 2014 @ 3:43 am

    2

    Look into setting up a trust. The trust can have rules about under what conditions the kids can receive the money, but it won’t be theirs, and it’ll be under the control of a trustee, whom you designate. It can even be you. With care, I’ll bet the rules of the trust can be set up in a way to let the kids benefit without it counting as their asset.

  3. John

    May 9, 2014 @ 12:10 pm

    3

    If the trust idea doesn’t work out, another option might be to pay off student loans after graduation. My son received Stafford (?) loans that were 0% interest until 3 months after graduation. I think you can gift someone about $10,000 with no tax consequences. Could maybe start the gifts when their senior year starts, without affecting financial aid?

    (oh, not sure if you are married, but a spouse would let you gift twice as much)

    Also, some states have a pre-paid tuition plan. For example, Michigan’s is at http://www.michigan.gov/setwithmet/0,4666,7-237-43437—,00.html

    Looks like the child needs to be a Michigan resident for that.

  4. jay c

    May 9, 2014 @ 12:13 pm

    4

    To answer the original question, yes, it does mean that.

    Mark, a trust would be generally be counted as the student’s asset. It is very difficult to do anything by the book besides 529s.

    “Uncle Phil” could always buy some Section 8 housing, have the tenants pay in cash for the tenant portion (most of them do anyway) and take the kids along and have them collect the rent. They would learn several valuable lessons over the next 8-12 years.

  5. Rif

    May 9, 2014 @ 6:00 pm

    5

    Phil, AFAICT the sentence you are referring to is part of the description of the situation pre-2006/2007. The current formula is much more favorable to students.

  6. Rif

    May 9, 2014 @ 6:01 pm

    6

    Oh wait, I was confused. You meant “literally handing the kids some money” rather than “putting the money into a child- or parent-owned 529?”

  7. fin-Aid guy

    May 10, 2014 @ 12:19 am

    7

    529′s are a scam. School’s *will* assume that is *their* money and take that off the top before looking at reducing their tuition/increasing financial aid.

    It’s a tough call looking into the future where taxes and scholarship rules will be. Still, there are a few things to think about.

    1. Are you only interested in funding higher education? How about a year off/art school/ a start up? If it’s anything besides “just school”, things are very different.

    2. Are you really giving the money to the kids or to the parents? A 10 year old is not an 18 year old. You have no idea what that 10 year old will grow into? What happens if they aren’t mature enough at 18 and your money will fund a soul crushing drug/gambling habit? Can you live with that? Look at your kids. What would you think of somebody who enabled them to destroy their lives? You’re placing a bet; it doesn’t always pay off.

    3. Are you just interested in these kids or is this just the tip of a philanthropic iceberg?

    A trust solves some many problems, but a well designed small trust will have setup and administrative fees eating away at it. If you goal is to provide peace of mind to the parents, not necessarily pre-fund some college expenses for the kids, a trust probably works best.

    If you just want the best tax/scholarship setup, keep the money yourself and “gift” the money when needed. As someone else mentioned, you can *generally* gift $10,000 a year. Assuming your wife is on board with this, that’s $20,000 directly to the student/year. You can also the same for each (surviving) parent, so it actually translates into as much as a gift of $60,000/year. You’ll have kids lining up to mow your law for that much money. (Hell, I might even stop by.)

    The best option if your middle of the income area and not maxing out your retirement accounts is to open a Roth IRA and fund it with the money you would give to the kids. When you need to give them the money, reduce your payments into your retirement accounts any pay them out of your current income. 8-10 years of growth in the Roth and you can skip a few years and both you and the kids will make out, (remember, I’m not talking about taking the money out of the Roth, but reducing your payments INTO your retirement accounts)This eliminates the risk of funding something bad as well. This is actually the best advice to parents looking to build a college fund for their own kids. Remember, 529′s are a scam. I can’t say that enough.

    There is another option. if you willing to go through the trust set up and maintenance, why not make up a charitable scholarship organization. You can fund THAT from your business as well. You would need to really be willing to help out other kids, not just the 2-3 you are thinking of, but then again, you can get your friends to chip in for their tax breaks as well. If you set up the criteria right, the kids you want will be a shoe in for the money when they turn of age. (check with a lawyer if this is fraud or not…)

    Finally, might you have 2-3 different kids you want to help out in 8 years? People come and go in our lives. Will the parents of these kids feel the need to be “nice” to you till they get out of school? Go in with your eyes open. You will buy some peace of mind for the parents, but you may also buy some uncomfortable strained relationships in the years to come. OTOH, a promise of money to come is even more insidious.

    Go with the trust, but I honestly think we will have a different price/funding system in Higher Ed in 10 years.

  8. Anonymous

    May 13, 2014 @ 6:38 am

  9. Bob

    May 15, 2014 @ 10:58 am

    9

    First I agree with fin-Aid 529s end up being are a dollar for dollar offset to student fin-aid

    Also concur with Anonymous. I have setup Kiss Trusts for my 3 children and they have avoided any reduction in fin-aid. I use the Kiss Trust Basic Plan and avoid any annual trustee fee.

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