Should we move our money out of a trust as we get close to filling out college financial aid forms?

We have a revocable living trust (in our child’s social security number) and hold authority over all assets in the trust which at them moment are invested in mutual funds. Our child is getting ready to enter college and we would like to transfer the funds into our joint money market account to: a) make the assets liquid, and b) get them out of our child’s name and SSN. We understand that in the FAFSA form, 20% of a child’s asset may be counted in aid calculations while only 5$ of the parent’s assets are counted. If we move the mutual fund assets into our account will the money be viewed as income by the IRS and will we be taxed on the amount above the $11,000 gift limit?

Asked on October 12, 2011 under Estate Planning, Ohio

Answers:

FreeAdvice Contributing Attorney / FreeAdvice Contributing Attorney

Answered 9 years ago | Contributor

Most likely the money transferred from the revocable living trust for the benefit of your child into a mutual fund (presumably in your child's name) where you are his or her custodian over the account in your name for tax purposes for income generated from the accout will not be deemed income just because of the transfer in that the moneys are not income per se. Monies generated as income from the account would be a taxable event for income tax purposes.

For further clarity on your desired transfer it is recommended that you consult with a certified public accountant and/or a tax attorney so as to make sure that the intended  transfer does not in fact create a taxable event for either you or your child before the transfer occurs.

Good luck.


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