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TRUST FUNDS AND TUITION PREPAYMENT PLANS
Trust funds in the name of a specific individual should be reported
as that person's asset on the application. In the case of divorce or
separation, where the trust is owned jointly and ownership is not
being contested, the property and the debt are equally divided
between the owners for reporting purposes, unless the terms of the
trust specify some other method of division.
As a general rule, the present value of the trust must be reported as
an asset, even if the beneficiary's access to the trust is restricted. If
the grantor of a trust has voluntarily placed restrictions on the use of
the trust, then the trust would be reported in the same manner as a
trust that did not have any specific restrictions. The way in which the
trust must be reported varies according to whether the student (or
dependent student's parent) receives or will receive the interest
income, the trust principal, or both.
INTEREST ONLY. If a student, spouse, or parent receives only
the interest from the trust, any interest received in the base year
must be reported as income. Even if the interest accumulates in
the trust and is not paid out during the year, the person who will
receive the interest must report an asset value for the interest he
or she will receive in the future. The present value of the interest
the person will receive while the trust exists can usually be
calculated by the trust officer. This value represents the amount
a third person would be willing to pay to receive the interest
income that the student (or parent) will receive from the trust in
the future.
PRINCIPAL ONLY. The student, spouse, or parent who will
receive only the trust principal must report the present value of
his or her right to the trust principal as an asset. For example, if
the principal is $10,000 and it reverts to a dependent student's
parents when the trust ends in 10 years but the student is receiving
the interest earned from the trust, the present value of the parents'
rights to the trust principal must be reported as a parental asset.
The present value of the principal is the amount that a third
person would pay at the present for the right to receive the
principal 10 years from now (basically, the amount that one
would have to deposit now to receive $10,000 in 10 years,
including the accumulated interest). Again, the present
value can be calculated by the trust officer.
BOTH PRINCIPAL AND INTEREST. If a student, spouse, or
parent receives both the interest and the principal from the trust,
the present value of both interest and principal would be reported,
as described above. If the trust is set up in such a manner that the
interest accumulates within the trust until the trust ends, the
beneficiary should report as an asset the present value of the
funds (both interest and principal) that he or she is expected to
receive when the trust ends.
If a trust has been restricted by court order, it would not be reported
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.
- NOTE THAT THE MICHIGAN EDUCATION TRUST AND
ALL SIMILAR TUITION PREPAYMENT PLANS ARE
EXCLUDED FROM BEING REPORTED AS AN ASSET
ON THE FAFSA. THIS IS A CHANGE FROM PREVIOUS
POLICY. (THE ANNUAL VALUE OF THE TUITION
PREPAYMENT SHOULD EITHER BE USED TO REDUCE
THE STUDENT'S COST OF ATTENDANCE OR BE
COUNTED AS ESTIMATED FINANCIAL ASSISTANCE.)
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