With my oldest son graduating from high school and planning his transition to college, I have recently navigated the college financial aid maze.   This seems as good a time as any to blog on how the trusts and business assets are considered in calculating the Expected Family Contribution (EFC) toward college costs. This post will cover trusts and the next one will discuss business assets.

Here is an explanation of how trusts and business are counted where the parent of the student is a beneficiary . Similar rules apply if the student is thebeneficiary of a trust.

For trusts: " As a general rule, your parents must report the present value of the trust as an asset, even if their access to the trust is restricted as beneficiary/beneficiaries. If the creator of a trust has voluntarily placed restrictions on the use of the trust, then they should report the trust in the same manner as if there were no restrictions. However, if a trust has been restricted by court order, they should not report it as an asset. An example of such a restricted trust is one set up by court order to pay for future surgery for the victim of a car accident."

So, if you or your parents set up a trust for your child, or if you are the beneficiary of a trust, you should expect that the trust will be considered an available asset to pay for college.  This is true even if you don't receive any current income or principal from the trust and have restricted access to the trust assets.  However, note that the value of the trust will be calculated as "the present value", which the rules define as  "the amount a third person would pay at present for the right to receive" the income or principal.  So, arguably when there are more restrictions on access to the trust then the lower the present value of the trust.

Whatever the trust value, Ken Clark, CFP writes that about 20% of the student's trust will be considered part of the Expected Family Contribution every year. 

As an asset protection device, trusts can have enormous value.  However, they have limited value in making the beneficiary eligible for financial aid.  I'm comfortable with that, since I don't believe in making yourself "look poor" in the expectation that others will pay for products or services that you need or want.