Question: My mother is elderly and gifted her house and a large bank account to me so that she could apply for Medicaid should her long-term care costs exceed her remaining resources. I am currently completing a FAFSA form for my son who is going to college next year. Will these gifts from my mother to me affect my son receiving financial aid? Can I put these assets into a trust for my benefit to avoid having to disclose them?
Answer: These gifts may affect financial aid for your son.
Before there were Elder Law attorneys, it was not uncommon for individuals to simply gift assets to their children without consulting with an attorney as to the various gift, tax and creditor implications. These gifts allow people to divest themselves of assets making them eligible for Medicaid to pay the cost of their long-term care, such as nursing home care. However, outright gifting can have adverse consequences.
The “Free Application for Federal Student Aid,” or the “FAFSA” is the form that parents and students must complete disclosing their assets and income. Colleges and the federal government will use the form to determine if any aid is available to the student. If a grandparent gifts property to the parent or student, these assets must be reported on the FAFSA.
There are some exemptions. If the home your mother gifted to you is currently your primary residence, this is exempt for financial aid purposes. Additionally, if you since refinanced the home, you could use the money in the bank account to pay down the mortgage, or any other debts, to reduce the resource amount. Small business are also exempt resources. If you’re the owner of a small business, the money received could be invested in the business thereby converting it to a non-reportable asset. Retirement accounts are also exempt, so making a contribution to your IRA or 401K may lessen the reportable resources.
What you should not do is gift money to the student, or their siblings, if the siblings could need aid in the near future. This is because student assets will reduce eligibility for need-based aid by a larger percent than parent owned assets.
Similarly, the law includes trusts in the definition of assets. Once you have received the assets from your parents, creating a trust naming yourself as a beneficiary will not avoid disclosure. In fact, some people have created trusts with restricted access in an effort to avoid disclosure for financial aid purposes and had a worse result. Since the assets in the trust are reportable, if the terms of the trust do not permit the Trustee to use the money for the education, but prevent the student from getting aid, it becomes a worse result than if the money had been in the parent or student’s individual name and available to spend.
Balancing Medicaid planning with financial aid planning is a difficult task and the family must weigh the pros and cons of each planning strategy. Be sure to consult with an attorney that is familiar with both sides of the planning before making any large transfers.