Gift money to kids can backfire if you don't check the fine print first

I put $3,000 into my daughter's savings account last year thinking it was a simple gift. Then her college financial aid office told me that money counted as an asset on her FAFSA, and it dropped her aid by over $1,200. Nobody warned me that the rules treat custodial accounts differently than 529 plans. Has anyone else run into this surpise with their kid's college money?

2 comments

2 Comments

ruby56118d ago

Did you set it up as a custodial account under UTMA/UGMA? That's exactly what tripped me up last year. I had to learn the hard way that those accounts count as the kid's asset at over 20% on the FAFSA, while a 529 in my name only counts at like 5% of the parent's assets. Fix I wish I knew sooner is you can move that money into a 529 plan and it won't hurt her aid nearly as much. Might be worth checking with a tax pro to see if you can still transfer it before the next FAFSA cycle opens.

finleyk8718d ago

Ruby's spot on about the FAFSA hit being brutal on custodial accounts. The 20% vs. 5% asset rate is a real killer, and it's not something banks or credit unions ever mention when you open those accounts. Transferring that money into a 529 might not fully fix the past but it could save you a lot of headache going forward, especially if you open it in your own name instead of your daughter's. Just keep in mind some states have a holding period for transfers like that to avoid penalties, so it's worth checking before you move everything.