Facebook Pixel How Do Trust Funds Affect Financial Aid for College?

How Do Trust Funds Affect Financial Aid for College?

Written by Mark Kantrowitz | Updated March 11, 2022

Trust funds must be reported as the beneficiary’s asset on the Free Application for Federal Student Aid (FAFSA), even if access to the trust is restricted. Trust funds can significantly reduce a student’s eligibility for need-based financial aid.

The Higher Education Act of 1965 specifies that trust funds must be reported on the FAFSA by including trust funds within the definition of the term “asset” at 20 USC 1087vv(f)(1). The statute does not provide any exceptions.

Any payments received during the base year (the prior-prior year) must be reported as income on the FAFSA.

Use our Trust Fund Calculator to determine the net present value (NPV) of a trust fund to help you value the trust fund for reporting it as an asset on the FAFSA.

Impact of Restrictions on Access to a Trust

Voluntary restrictions on access to a trust, as established by the grantor of the trust, have no impact on the financial aid treatment. The trust must still be reported as an asset.

Unfortunately, restrictions on access to a trust may prevent the family from liquidating the trust. This means that the trust will persist year after year, hurting the student’s eligibility for need-based financial aid each year. The cumulative reduction in aid eligibility may even eventually exceed the value of the trust.

When Can a Trust Fund be Disregarded?

The U.S. Department of Education has issued guidance in the Application and Verification Guide to indicate that involuntary court-ordered restrictions on a trust can cause the trust to be disregard. According to the U.S. Department of Education, “If a trust has been restricted by court order, however, the student should not report it. 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. “

If a trust has been frozen by court order, the trust is disregarded as an asset until the court order is lifted. This can occur when a will is being contested. When the estate has been settled, the trust fund will be reportable as an asset.

A trust fund can also be disregarded if the existence of the trust is unknown to the family. If the family does not and could not know about the trust fund, they have no obligation (or ability) to report it as an asset on the FAFSA. However, most states have laws that require disclosure of a trust fund to the beneficiary.

Trust funds can be ignored if the beneficiary’s receipt of trust funds has not yet been determined. Suppose a trust is established where the beneficiary’s receipt of funds is based on a future, nondeterministic event, such as a coin toss, and otherwise the trust funds go to a charity. Then the trust fund is not reportable as an asset on the FAFSA because the beneficiary’s receipt of the trust has not yet been determined.

But, Isn’t a Trust Just Like a Gift?

Some trust fund beneficiaries try to claim that the trust fund should be treated the same as a gift from the grantor, which is not guaranteed to occur.

But, a trust fund is different, in that it is usually established as an irrevocable gift. The discretion provided to the trustee is irrelevant.

Even when a trust fund is revocable, the baseline assumption is that the money will be distributed as provided for in the trust document.

How to Calculate the Asset Value of a Trust

The asset value of a trust is the current value of the trust’s assets.

Some trusts split ownership of the income and principal of the trust, with some beneficiaries receiving just income from the trust for a period of time and other beneficiaries receiving the principal at a future date.

When ownership of a trust is split in this manner, the value of the trust for a beneficiary is the net present value (NPV) of the future stream of payments the beneficiary will receive from the trust. This is the sum of the NPV of each payment.

The net present value discounts each future payment according to a discount rate. This reflects the fact that a future payment is worth less in current dollars than a current payment of the same amount. Usually, the discount rate is a risk-free rate of return, such as the current yield of a U.S. Treasury of comparable maturity.

The sum of the net present value for all of the payments to all of the beneficiaries of the trust should equal the current value of the trust.

Multiple Beneficiaries of a Trust

If a trust has multiple beneficiaries, the beneficiaries are treated as having equal shares in the trust, unless the trust specifies otherwise.

A trust fund can specify a different split, such as one beneficiary receiving two shares and the other beneficiary receiving one share. It is much more common, however, for a trust to specify an even split.

Types of Trust Funds

The following types of trusts must be reported as an asset of the beneficiary on the FAFSA.

  • Blind Trusts
  • Charitable Trusts
  • Crummey Trusts
  • Insurance Trust
  • Living Trusts
  • Medicaid Trusts
  • Section 2503(c) Minor’s Trusts
  • Special Needs Trust
  • Spendthrift Trusts

The following types of trusts must be reported as an asset of the grantor on the FAFSA.

  • Totten Trust (Payable on Death)

Was this article helpful?

About the author

Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make informed decisions about planning and paying for college. Mark writes extensively about student financial aid policy. He has testified before Congress and federal/state agencies about student aid on several occasions. Mark has been quoted in more than 10,000 newspaper and magazine articles. He has written for the New York Times, Wall Street Journal, Washington Post, Reuters, Huffington Post, U.S. News & World Report, Money Magazine, Bottom Line/Personal, Forbes, Newsweek and Time Magazine. He was named a Money Hero by Money Magazine. He is the author of five bestselling books about scholarships and financial aid, including How to Appeal for More College Financial Aid, Twisdoms about Paying for College, Filing the FAFSA and Secrets to Winning a Scholarship. Mark serves on the editorial board of the Journal of Student Financial Aid and the editorial advisory board of Bottom Line/Personal (a Boardroom, Inc. publication). He is also a member of the board of trustees of the Center for Excellence in Education. Mark previously served as a member of the board of directors of the National Scholarship Providers Association. Mark is currently Publisher of PrivateStudentLoans.guru, a web site that provides students with smart borrowing tips about private student loans. Mark has served previously as publisher of the Cappex.com, Edvisors, Fastweb and FinAid web sites. He has previously been employed at Just Research, the MIT Artificial Intelligence Laboratory, Bitstream Inc. and the Planning Research Corporation. Mark is President of Cerebly, Inc. (formerly MK Consulting, Inc.), a consulting firm focused on computer science, artificial intelligence, and statistical and policy analysis. Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU). He has Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU. He is also an alumnus of the Research Science Institute program established by Admiral H. G. Rickover.

Full bio →

A good place to start:

See the best 529 plans, personalized for you

Helping families save for college since 1999
Join our email list

The latest articles and tips to help parents stay on track with saving and paying for college, delivered to your inbox every week.

Frequently featured in:

Saving For College is an unbiased, independent resource for parents and financial professionals, providing them with information and tools to understand the benefits of 529 college savings plans and how to meet the challenge of increasing college costs.

20533 Biscayne Blvd Ste 4 #199 Miami, FL 33180-1501Phone: (585) 286-5426Copyright © 2025 Saving for College, LLC. All Rights Reserved