Before Making Gifts to Kids!
As year-end approaches, some parents and grandparents turn their thoughts to year-end tax and estate planning strategies. Among these strategies often is making year-end gifts to children or grandchildren to take advantage of the annual gift-tax exclusion.
However, if the kiddos are receiving college financial aid (or possibly applying for such in the future), these gifts can cause a problem. You see, such gifts, while perhaps being good tax and/or estate planning strategies, can often result in less financial aid for your child or grandchild.
As background, annual gifts can be made up to $14,000 per recipient, or $28,000 if the gift is split with your spouse, to any number of people with no gift-tax consequences in 2017. These amounts will increase to $15,000 and $30,000 respectively in 2018. Once a gift is made, the assets are removed from the giver's taxable estate, the assets are then the property of the recipient, and any future income on the gift amount is taxable to the recipient.
The problem in terms of college financial aid stems from how assets are treated for financial aid purposes. To determine an aid amount, a college takes the cost of attending that school and subtracts your "expected family contribution", or EFC.
When determining the EFC, a college generally considers the parents' income and assets, as well as the child's income and assets. Compared to the parent's assets, financial assets belonging to children have a far greater impact on a family's eligibility for financial aid.
A maximum of 5.64% of the parents' "unprotected" assets and between 22 and 47% of the parents' income are included in the EFC. So called "protected" assets are not counted at all. The exact amount of assets protected depends on the number of parents and the age of the older parent.
Contrast this with the child, where 20% of the child's assets and up to 50% of the child's income are included in the EFC, and perhaps you see the problem. The difference between 20% of the child's assets and 5.64% of the parents' assets can make a significant difference in the ultimate financial aid awarded.
In other words, the more assets the child owns, the higher the amount of the "expected family contribution", and the lower the potential amount of college financial aid.
So before starting or continuing an annual gifting strategy with your children or grandchildren, you may want to consider the possible impact on college financial aid calculations. It's a wise idea to familiarize yourself with financial aid formulas, and consider doing a rough calculation of what you might expect in terms of aid.
You should also keep in mind which college or university the child is likely to attend. I have read recently that some colleges have decided to only consider 5.64% of both the parents' and student's assets in their aid calculations. While the federal financial aid formula and other colleges have not yet followed suit, the calculations could change in the future, so keep watch.