Dear Dr. Don,
My 80-year-old father plans to gift my son about $12,000. I think it's best to deposit the maximum amount, about $1,000, into my son's Roth individual retirement account. I'm not sure what to do with the rest. And I don't know how this will impact my son's eligibility for student financial aid. My son is a high school senior who's currently applying to college. What should we do?
-- Cathy Collegiate
Your father's gift should be tax-free because it falls below this year's annual gift tax exclusion of $13,000. The annual exclusion includes all gifts, with birthday and holiday checks from your dad counting toward the total.
However, it would still impact your son's financial aid eligibility.
The Free Application for Federal Student Aid, or FAFSA, considers how much to lend students based on a variety of factors including its estimate of an expected family contribution. That estimate is based on family and student incomes and assets. And money held in the student's name has a bigger impact in reducing financial aid eligibility then money held in a parent's name.
One way to mitigate this is to have the money placed in a custodial Section 529 college savings plan. Money held in the plan is treated as a parental asset if your son is your dependent -- even though your son is both the owner and the beneficiary of the account.
Your dad could even elect to aggregate five years' worth of gifting to a 529 plan without it being a taxable gift. If he dies within five years of making that gift, part of the funding would be added back to the estate.
These options could still limit your son's chances at financial aid, however. So, if obtaining financial aid is his primary goal, then I suggest you limit the amount of money your father gives right now.
I think your father should only give what your son is eligible to contribute to his Roth IRA. Contributions to a Roth IRA are regarded as retirement planning and won't impact your son's financial aid as long as he doesn't take out money from the account.
Your father could then help out with your son's college expenses in his senior year. Or, he could help pay student loans post-graduation.
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