A frequent concern among grandparents is whether establishing a trust for the benefit of a grandchild will have a negative impact on the child's application for financial aid. I recently researched this question, and this is what I found out:
Most student financial aid in this country is determined based on one application process, the FAFSA: Free Application for Federal Student Aid. The application requires a complete report on the income and assets of both the student and the student's parents. The application requires that "trust funds" be included as investments owned by the student. A separate guide, "Completing the FAFSA" adds this helpful language: "you must report the present value of the trust as an asset, even if your (the beneficiary‘s) access to the trust is restricted. If the creator of a trust has voluntarily placed restrictions on the use of the trust, then you should report the trust in the same manner as if there were no restrictions." The reference to "present value" refers to a calculation to find the value, now, of money that will not be received until a later time. A Gifting trust, such as I have drafted for my clients allows the trust property to be used for health, education and maintenance of the student by either the donor as Trustee, or by another named person as Trustee. Since the assets in such a trust are available at any time, I don't think that "present value" calculations apply. I think such a trust should be reported as an asset of the student under these rules. So, yes, such a trust does "count" when a student applies for financial aid.
It does not seem to matter who the Trustee is. I have not been able to find any guidance about trust funds and FAFSA that says anything about trustees. The Department of Education identifies the trust as an asset based on who the beneficiary is. It does not seem to matter whether the trustee is the donor, the student's parent or the student him- or her-self.
Does this mean that you should not create a trust for your grandchild? Not at all. For one thing, the mere existence of a trust will not disqualify the student from obtaining financial aid. The property in the trust will simply be a factor in determining how much aid will be available. Many students, 40% according to the Department of Education, never even apply for financial aid. (http://www2.ed.gov/policy/highered/leg/hea08/simplification-transmittal.html) So, like most questions in estate planning and elder law, this decision is an individual one, with no simple answer.