Good Evening To allI have a friend, single mother of two teenage kids. Both are destined for college. Her father just passed away. He had life insurance so she now has $750,000 sitting in an account. She is concerned if she invests this money it will hurt her kid's chance of getting scholarships or student loans. She is also unsure what to do with the money because she has no idea where she may be in 3 to 5 years.Is there a way she can invest this money without it being shown as an asset in the eyes of student loans and scholarships?Thank you in advanceGary
Hi Gary,I've tried to come up with a positive post for your friend's dilemma, but I just can't do it. If it were my friend, I would consider grabbing her by the lapels to get her attention and asking her "WTH are you thinking"? She has three quarters of a million dollars(!) and she wants some way to hide it from the colleges so her kids can get scholarships?! She has absolutely no sympathy from me, nor from the tens of millions of other parents out there who are scraping by without an almost 7 figure bank account.OTOH, I know what it's like to get a large sum of money and the denial, fear and yes, grief that comes with it. Her first step is clearly going to be coming to grips with the fact that she has serious money and with that comes obligations to society that she may not have had before. One of them is paying her fair share of college costs; and it's going to be 100% unless her kids are sports stars or geniuses.She's also going to have to spring for a computer of her own and an internet connection. And, she should really consider coughing up another $30 or whatever it is for a online subscription to the Fool site. There is lots of information that she can get here for basic finances (which it sounds like she also needs) as well as investment tactics. She should also read a number of the better books on investing that are out there, as well. Another option is to hire the services of a Certified Financial Advisor (or whatever the exact term is, it's been posted recently) and not have anything to do with her money.If she's in denial, and I'll grant that that could be the real problem here, then she's going to have to find a way to deal with it; even if it's seeking counseling services for awhile, till she's able to cope. Somewhere along the line, she's going to have to really understand, on a gut level, that this is a life-changing event and she's never going to be the same person she was before. I really hope she doesn't succumb to the temptation of giving gobs of money to "needy" relatives and buying Porsches and Ferraris. So many jackpot winners do this and wind up without even the jobs they had when they started.Good luck to her in coming to grips with this.Hedge
HedgeI agree with you 100%. I am sure you understand that since she is a friend who has just gone through a tremendous loss I do not want to lay into her. One thing at a time. Yes I think she is in denial along with overwhelming responsilbility to her kids and this new money. Thank you very much for taking the time to respond. Everyone have a nice weekend.Gary
I am sure you understand that since she is a friend who has just gone through a tremendous loss I do not want to lay into her. One thing at a time.Agreed. However, keep in mind that even in grief, there is a capacity to focus on things. In fact, something like this may just be the distraction that she may be looking for to occupy her mind.Myself, I found that there were new things that I had a capacity to be extremely focused and other, simple and rountine tasks, that I was an absolute basket-case and floundered.From the OP:He had life insurance so she now has $750,000 sitting in an account.Maybe this can be a starting point.If she placed these funds into an account, then I'd be certain that she had to apply a SSN to this account. So, the funds can be traced from here on out anyhow.At this point, I'd at least flag, to her attention, that she should at least spread this out across a few different institutions. If she has this all stashed in an account at one bank, that account's FDIC insurance is only protecting $100k of it.As Hedge noted, she needs time to sort things out and learn. So perhaps the best thing for right now is to spread the funds across several MMAs. I can think of 4 banks off the top of my head that are yielding 3% or more - which exceeds the yields on 12-18 month CDs - check bankrate.com for rates on both MMAs and CDs.This will at least keep the funds insured and yielding something on pace with inflation. Thus giving her a year or so to get through the initial wave of grief, to learn and plan.She really needs to avoid the quick-fix solution of trying to name her kids as joint tenants to increase the FDIC coverage. POD would be the better way to title the accounts for now.She'll also need to realize with this windfall that she needs to update her own estate plan - probably something more urgent than figuring out where to invest the funds.The harder thing to convey, which Hedge touched upon, is the drive towards irrational spending. When we're hurting, we're even more susceptible to buying things that we think will make us feel better now. It's hard enough to discern if one is 'taking action' vs. 'reacting' in the best of times.Even worse is that there are those that are very parasitic on people in her position.Best wishes for you friend. She's lucky to have someone keeping an eye out for her interest in her hardship.
Even worse is that there are those that are very parasitic on people in her position.Some years ago someone at the church I attend asked me to talk with a relatively young woman member whose husband had died and left a fairly substantial amount of life insurance. He had handled all the money matters and she was floundering around. She had deposited it in her bank and talked with someone in the bank investment department who helped her buy two stocks and place most of the money in money market funds which were, at that time, returning a reasonable yield.This woman then talked with a number of her woman friends and several of them mentioned stock brokers that they knew. This woman then talked to all these brokers and was so confused that she did not know what was going on.One well regarded broker had tried a scare tactic. When she told him she had bought the two stocks, he responded with, "I hope these purchases have not gone through. You need to have the bank reverse them immediately if they have. Then open an account with me so we can place your money in wise investments."I looked at the two stocks and there was nothing bad about them - maybe not the best buys of the day but certainly good sound growing companies.My free advice to the woman was that the stocks she purchased were OK and that she should not be worried about them, that she should do nothing further with the money until she had read a good book on investing. Then she should be more comfortable selecting someone to help her with her investments. I recommended an excellent book for a person with her level of knowledge. She responded with, "I don't have time to read a book, I am too busy teaching school." I don't know what happened after that. It is sad that there are people who just insist on being uninformed and therefore dependent on others, some of whom will take advantage of them.
It just struck me that a few years ago I got a review copy of a book called Sudden Money that I remember as a pretty good place for someone like this to start. Here's the link to the book at Amazon : http://tinyurl.com/cwnsd but she can probably get it from her library.rad
I bought the book, now I suppose I should buy a lottery ticket.
This website has some useful information and resources related to inheritance and the emotional issues that go with "sudden" money.www.inheritance-project.comgregg
I'm sorry. I don't normally read a lot of these posts and even less seldom respond. I thought the topic would be about the loss of a spouse, and the other spouse's ability to carry on the household, take care of the children and plan for the future. My wife has very little financial experience. Even though I try to keep her informed, I take care of everything. I thought this post would be some good info I could send on to her.Am I reading this wrong? Here you have a woman, who already has the tough job of raising kids as a single mother, and then loses her father? Raising kids as a married person is hard enough, and I lost my own mother as a young man, so I can sympathize with the loss of a parent.Here's where I become unpopular. What I can't seem to sympathize or empathize with is how receiving $750,000 is a problem. Even under less than desirable circumstances, this is like winning the lottery and complaining about the taxes.What were this women's prospects of paying for college as a single mother with two kids to begin with? My parents didn't have the money to send me to school, and I put myself through college without a scholarship or any grant money. I did it with a job and some student loans. I would think that 3/4 of a million dollars kind of solves the "how am I going to pay for college" question...wouldn't you think? I know tuition is expensive, but jeez...and it's not like they're infants...they're teenagers...$750k can still buy a lot of text books in a few years.Instead of being concerned, she should be relieved. She has been given a way to pay for her children's college without strapping herself or them with debt. This money has opened the doors for them to attend pretty much any college they want...if they can get in. It is also a blessing that her children are college bound, which is an honor and a privelege both for them and for her as a parent.She already has survived on one income and raised two kids. She'll be fine. She lost her father, which is sad, but it is much worse for people to lose a spouse when they have young children. Not only do they have to have money to raise the kids until adulthood, but they have to deal with the shock of single responsibility paying for a lifestyle built for two...usually without experience to do it.Sorry for ranting. I think it's only fair I try to answer the question now.I could be totally wrong on this, but I believe it used to be that determining financial aid was based upon the assets of the student and the last two (or three?) years of income of the parent. I don't believe they took into consideration savings of the parents. Put as much of the money into a retirement vehicle as possible. Then, as much into a long-term savings vehicle. The better protected the investment the better. Don't give the money to the kids or invest in the kids's names. Don't put it into an education ira. she should take care of herself first. put aside the amount she thinks she needs to pay for college in a safe investment...like a CD (if the kid is going to college in 3 years...a 3 year CD, etc.)...rates aren't bad.
Is this a sign of the times? Why would a person sitting on this fund plan to compete with kids who need financial support?
As a mom who has gotten two girls through college and halfway through our son's educational experience, one thing I can tell her is to make sure she DOES NOT put any money in the kids' names. She can put it into a revocable trust so that it does not show as a personal asset to her. The way that the FAFSA form for determining student aid works is this: all assets of parents and children are listed and a formula is applied to determine the amount the family should be able to pay. If a child has assets, the formula takes 35 - 40% of what is listed into account as available for college. They only assess 3-5% of the parents' assets. One good thing is that if the two kids are in school at the same time, she will likely get more money for the younger one, since some of her assets are going toward the older one's educational costs already. Tell your friend to encourage her kids to look into the numerous scholarship books available at the library, there are scholarships available for all sorts of things. Something else to consider, which we discovered quite by accident is a sibling program at George Washington University in DC...I do not know if other colleges offer anything like this, but she can always ask. Our daughters were two years apart in school and both decided independently that they liked GW. The older one was awarded a special half-tuition scholarship offered by a subsidiary organization of the Masons (called Scottish Rite...Washington was a Mason and the organization has close financial ties to the university), which was very nice. When our younger daughter expressed the desire to also attend the college, we commented to the president that it was too bad she couldn't also get the same scholarship....at which point he told us there was no reason she could not apply, they didn't care about giving it to siblings. The college also has a wonderful policy to encourage families to stay there - they offer half tuition to siblings who attend at the same time. End result - it cost us the price of a state school education for our older daughter's degree at GWU and our younger daughter attended for basically only room and board for two years, and then half tuition the other two. Tell your friend that when her kids are looking at colleges, she should definitely visit the financial aid office and ask what options are available if her students want to attend that school. Our son is going to RIT for engineering. He did not win any scholarship money (didn't care about grades in high school), but as part of his 5-year program, he must complete 3 or co-op work blocks. Most co-ops pay fairly well so he is paying for some of his education with what he earns, which is tantamount to getting financial aid, in my book.Wish your friend good luck from me, and tell her it goes faster than she can imagine.Robyn
Our friends dilemma needs a strategy. And she can do it. First, she needs to find a time frame in which her children will need the money for school. The price for education will increase over time so she needs to adjust her future value and overestimate the amount needed. This way, she'll have an idea of what amount to put aside. Then, she can place that amount in a conservative, slow growth account such as a CD or even a trust fund. This will calm her worries over the price of her children's education. The remainder can find its way into real estate and be safe for now. It will be a long time until that bubble breaks...if it does at all.....so she can adjust her strategy when that time comes. This is my opinion and with that amount, I think its a solid strategy. Good luck
For Gary, Hedge, et al...Hedge, while I do agree with everything you have said and would ammend your comments with "Amen", there may be another side to Gary's post and the woman's concerns.I was recently involved in an accident which necessitated brain surgery (literally). I am also self-insured which is not the same as "uninsured". Within 6 hours of my return to consciousness, a young man from the hospital's Business Office was sitting at my bedside, taking a financial statement and clearly looking at every dime I had as an "asset". His questions, comments and forms all centered around Medi-Cal. For those who understand this program nothing more needs be said. For those unfamiliar with Calif. Medi-Cal, it isn't for the patient, it is for the providers. Medi-Cal transfers the responsibility and authority for acquisition of assets from the health care providers to the State.Try as I might, I could not convince the young man (or anyone else, for that matter) that what they saw as "assets" weren't assets at all...they were my stock in trade. Those assets were and are the means by which I earn my keep. Seizing these assets would not pay the bills and would only result in de-capitalizing me and my ability to remain "above indigent".Fortunately, I was able to reconfigure my holdings, liquidate some of my accounts and pay all of my bills in full. However, the 30 days following my surgery were not characterized by "medical recovery" in any sense. They were a full-tilt boogie exercise in financial management and fending off folks who simply could not grasp the difference between "a pile of money" and necessary "stock-in-trade".I suspect that something like my experience is operating in the mind of Gary's friend.As for advice, I would suggest that the woman take herself, "post-haste" to a good Tax Attorney and establish her funds in a Trust. Who manages the Trust is open to the woman's situation but it will afford her some conservation of her capital for long term needs and may allow her children some access to assistance for their education.Yes, I agree that the woman may not be "clear on concept" and should not be trying to play "what's mine is mine and everything else is up for grabs". On the other hand, given Gary's description of her situation, she may be merely trying to support herself in the future without penalizing her children in the process.Mike
Hi Garyit will hurt her kid's chance of getting scholarships or student loansI wouldn't say 'hurt'. Her kids can get loans (lots of people whose parents have assets of 750K get student loans); it shouldn't affect them for merit-based scholarships; and obviously it will reduce their chances of getting need-based scholarships, since they no longer 'need' them.Is there a way she can invest this money without it being shown as an asset in the eyes of student loans and scholarships?The direct answer to her question is "probably not without lying or breaking the law in some way". I would say that what your friend could use most is some education on exactly what this money means to her. Perhaps she doesn't realize that, properly invested, the money from her father's estate IS the scholarship her kids need to get though college. Maybe she doesn't understand that she can have her cake and eat it. That if she manages the money (and the kids) wisely she can still have the 750K AFTER putting her kids through school.There's a whole lot we don't know here, such as her current income, available local and state colleges, kids ages, grades, ambitions, etc., but off-hand I'd suggest that she spend a little time with Matthew Emmert's newsletter and work on creating an income portfolio that will support her and the kids through these next crucial years.~Bill
Try as I might, I could not convince the young man (or anyone else, for that matter) that what they saw as "assets" weren't assets at all...they were my stock in trade. Those assets were and are the means by which I earn my keep. Seizing these assets would not pay the bills and would only result in de-capitalizing me and my ability to remain "above indigent".Fortunately, I was able to reconfigure my holdings, liquidate some of my accounts and pay all of my bills in full. However, the 30 days following my surgery were not characterized by "medical recovery" in any sense. They were a full-tilt boogie exercise in financial management and fending off folks who simply could not grasp the difference between "a pile of money" and necessary "stock-in-trade".Mike,This is a worry that I have, and it sounds like I have a lot fewer resources than you do. I'm glad it worked out for you. I have to admit that I always considered it "a pile of money" till that's all I had to live off.Hedge
If she's so concerned about getting scholarships to pay for schooling, tell her to send her kids to Canadian universities for their education. Unless her kids are planning to attend Ivy league schools, the education they will receive at mid- to upper-end Canadian university will be as good if not better than a mid-tier US school, and would come with the added benefit of experiencing a "foreign" culture (not too different than US culture, but still different). Even though her daughters would be subject to a foreign student premium, the cost would still be less than 1/2 that of a US private college.coldcanuck
As a mom who has gotten two girls through college and halfway through our son's educational experience, one thing I can tell her is to make sure she DOES NOT put any money in the kids' names. She can put it into a revocable trust so that it does not show as a personal asset to her. ============================================================How can a revocable trust not be an asset? If it's revocable, the grantor can take back the money anytime. As I understand things this money would still count as part of the parent's asset base subject to 3-5%.For the record, I agree with the other posters that she should be grateful for this and not trying to scam freebies she doesn't need.
For the record, I agree with the other posters that she should be grateful for this and not trying to scam freebies she doesn't need. Financial aid directors are not stupid and may use professional judgement to adjust any awards. Encouraging kids to do well in school is a far better way to go than trying to game the system. Most need-based aid is loans these days and it is likely to continue. More merit-based aid is the trend for non-loan aid.rad
Gary,Having experienced loss and unexpected gain while parenting two kids into college, I offer these suggestions for your friend:Open a brokerage account that allows her to invest the money in CD's online, up to $90k per CD per bank, so the money and interest earned is FDIC insured and earning returns (Fidelity worked for me. They will do the investing for you by phone if you aren't online saavy.)Invest in CD's with 6 to 12 month timelines while learning more about investing and who to trust as an advisor (VERY IMPORTANT)Hire a solid and well-respected estate planning attorney to help her set up a revocable trust and then put the brokerage account in the trust, with a survivor trustee she knows will take care of her children's needs until they are of age to inherit, should anything happen to her. You don't want young kids getting money dumped on them.Retain 6-12 months operating expense money in a money market, for safety but don't get frivilous with spending just because the money is there.Keep her day job - benefits, friendships and stability are important, unless she works for Attila the Hun. find another job, if so.Yes, her life has changed - not to quite the extent some imagine, after all, in some places in the country you can barely buy a fixer upper for $650k (in the sunny clime where I live that is true).However, her long-term choices re: her retirement, college funding, where to live, buying a home or upgrading, getting more education for herself, a new car - will/should take time to think this all out for the best results. It is easy to spend money like water, and then it's gone.Regarding college costs, my experience is that all assets, except for my home, were considered for the purpose of deciding my ability to pay for my kids' education. My kids were eligible for merit scholarships based on their academic records at the private colleges but not for need-based scholarships at the public ones. Loans are available, some interest-deferred, some not.Her desire to protect the money and her kids eligibility is understandable, in light of how new the 'having money' part is. When you haven't had money, looking for ways to hold on to it is a good idea. On this one, though, the government has strict rules. Bending the truth is not optional. Suze Orman suggests a year's wait before serious stock investing after widowhood, death of a spouse or divorce or other traumatic event that results in an inheritance. Her idea is CD and/or bond laddering. Grief limits good thinking, as does ignorance when someone is new to investing.Reading, listening to advisors (without acting on advice even/especially if they claim the sky will fall in if she doesn't), and talking to people she can trust, to learn from their experiences, will be ways for her to decide her future. Over 6 to 12 months she will be more confident and more sure of some things. She still needs to progress slowly and learn her own investing inclinations and risk tolerance. She can also hire a life coach to help her work through setting 3-5 year goal plan. Her horizons have been enlarged by the money's potential.I empathize with her situation, it is trickier than some appreciate. After all, how many lottery winners blow up their lives to nothing. Money matters are not easy to master. If they were, Motley Fool would be out of business. ;-)Best wishesKaren
Hedge is right. Your friend is trying to fake reality. It is important for her to understand that she will create misery for herself and her children if she tries to obtain scholarships under false pretenses. Her self image will suffer; she will teach her children the wrong values; she will not be happy. She should embrace the inheritance and do her best not to waste it. Good luck.
Instead of bank CDs and money market accounts, I suggest the Vanguard Admiral Treasury Money Market Fund. It has an even LOWER expense ratio than normal Vanguard funds (since the high minimum balance requirement allows the fund to be run more cheaply), everything is invested in US Treasury Bills (MUCH safer than banks), and it outyields nearly all banks. Remember: FDIC insurance is limited to $100K per person per bank, banks are always merging (which makes it harder to remain diversified among banks), FDIC insurance doesn't cover interest, and (most importantly) it's better to not rely on the FDIC anyway. If your bank fails, your money is frozen and earns NO interest during the weeks or months it takes to collect from the FDIC.
Gary,First off, most of the replies so far don't deal with your question directly and are more about what to do with the new money totally unrelated to college so not much help.It just so happens that I just consulted an advisor on how best to set up my finances to maximize the amount of financial aid I can get for my 4 kids the first of which starts college in 2 years.It is a complex question and one you can't answer without knowing the full situation of your friend. What does seem obvious is that with that much cash on hand she can kiss any financial aid goodbye.There are two types of aid, scholarships and non-scholarship (grants, loans, etc). Scholarships are real tough to get and make up a tiny percentage of aid available. Advisors have recommended that we don't even bother with the majority of scholarships. The rest of the aid available is based on the assets of the student and parent(s).The aid formula looks at the total cost of education and subtracts "estimated family contribution" or EFC. The difference is what they will make up in some sort of aid package. To maximize the aid received you need to minimize EFC. EFC is a weighted formula based on all assets (cash, brokerage accounts, cars, house, etc.) Colleges each apply the formula differently. For example, some count the house against you others don't. There's also a whole bureacratic nightmare just to apply for aid. Aid is also effected by scores on the ACT. Submitting forms early also helps. Timing on these is critical.The goal in aid planning is to minimize your asset base so you minimize the EFC. With 750K of cash, you would have to shelter it in some way that only a financial advisor specializing in this type of scenario could help with.I've found that tax advisors know tax, estate planners know about death and retirement, accountants know a little about everything but none understand how to put a wholistic picture togeter that balance them all.Your friend needs professional help in all these areas so start looking for a good advisor. There are some solid planners around that specialize and I'ld definately get one your associates recommend not someone you look in the yellow pages.Good luck.Cudo's to her father for providing for her in that and the grandkids in that way.TylersDad
Is this a sign of the times? Why would a person sitting on this fund plan to compete with kids who need financial support? /=====================================================================Because it's "free" money. If I can get a student loan at 3% and leave my money invested at 8%, why the heck wouldn't I want to do that. If smart planning helps minimize your college cost at the same time allowing me to maximize my returns on assets you should be doing it. Since when does how much money you already have prevent you from being Foolish?Come on, thats what being Foolish is all about. You kicked,screamed and struggled for every penny, or at least someone did. Do you skip the sales at the local store because you can afford to pay more? Get real.
I'm going to take the contrary view to just about everybody else on this thread.Financial aid is a system, like many other systems. There are rules to follow. Some of the rules make sense, while others don't. But there is nothing unethical about looking through the rules to see if there are things you can do to get a better situation. With a fixed lump sum of money that may have to last a lifetime, it's critical that a grieving family do everything it can to get a firm grip on their finances as quickly as possible.Is it unethical to set up a bypass trust for your spouse? By doing so, you potentially reduce or eliminate estate taxes. Is it unethical to buy equipment for your business simply because there are provisions that allow you to deduct the cost immediately? Of course not. Most of the posts seem to think that there's no way this person could get financial aid without doing so under false pretenses, and that's just ridiculous. The July 2005 issue of the Journal of Financial Planning has an excellent article on the huge variety of college planning considerations. The article states that all other things being equal:- Increasing parental income reduces awards;- Increasing parental net worth reduces awards, but not as quickly as income;- Increasing student wealth reduces awards more quickly than increasing parental wealth; and- Increasing home equity has no effect on the federal aid formula, although individual colleges might take it into account.http://www.fpanet.org/journal/articles/2005_Issues/jfp0705-art6.cfmIn addition, there are some other complicated rules that don't make a lot of apparent sense. The two types of 529 plans are treated differently: 529 prepaid tuition plans are not considered an asset, but 529 savings plans are. I have heard life insurance agents say that money held within life insurance policies is not considered as an asset; they then try to sell universal variable life policies as a way of obtaining investment returns packaged inside an exempt life insurance asset. Similarly, retirement funds may get preferential treatment.There's a website designed to help you maximize awards:http://www.finaid.org/fafsa/maximize.phtmlThis site makes it clear that there's a distinction between hiding assets and sheltering assets. The rules let you shelter assets. In my opinion, there's nothing wrong with using the rules to your best advantage.You can also check this site:http://ifap.ed.govalthough it's geared more toward financial professionals and seemed a lot more difficult to navigate than the finaid.org site.Finally, keep this in mind: $750,000 may sound like a lot of money, but we don't know the purposes for which the insurance was bought. If the sole purpose was to pay for college for the kids, then it should be plenty. But if it was meant to support the surviving spouse for life, it's important that as much of those funds as possible be preserved not only for kids' college but for the surviving spouse's own living expenses.dan
Gary, comments regarding sheltering in the posts aren't in the traditional sense of the word where your looking for a tax loophole that may or may not be illegal. By sheltering you find an investment vehicle that is not included in the formula for estimated family contribution. So in a sense it's sheltered from the aid calculation.I don't know whether an irevocable trust counts as "sheltered" or not for this purpose. The earlier poster seemed to think it was so is worth investigating.Good luck.
I never reply and rarely read these posts, but I had to comment on this.I'm not what anyone would call an financial expert, but it seems that everyone commenting here is missing the point.Most of the responses suggest that Gary's friend is irresponsible or greedy for wanting to get financial aid for her two daughters when she has all that money in an account.No one seems to realize, this wasn't a winning lottery ticket. Her husband died and his income is gone. The life insurance is meant to replace that income for a time. There was a lack of details in Gary's post, but if her husband made $75,000 a year, which is no great sum, this money is only the equivalent of 10 years salary. If he was making $125,000, it's only enough for 6 years. However, she might well be in her 30s which would mean she has a lot of years beyond those 6-10 years to figure out how to live. There are a lot of questions people should be asking. Did she work before her husband passed away? If so, how much is she making. Does she have any marketable job skills? How much of a pay cut is it going to equal out to? No one seems to be asking these questions. Everyone wants to jump on her for wanting to take financial aid money out of the mouths of those who really need it, but she and her daughters may very well be the ones who need it. $750,000 ain't what it used to be.Anyway, my opinion is, keep your opinions and moral judgements out of it and answer his question, which was:"Is there a way she can invest this money without it being shown as an asset in the eyes of student loans and scholarships?"P.S. I would also be wary of the book Sudden Money, because not all the reviews on the Amazon page were raving endorsements.
GaryMy grandparents passed away this last december and left us (grandchildren) a substantial amount of money. We are each getting just under half of what your friend has already received. I have also just finished law school (2nd career kinda thing). To answer your question, Not really. Well if she donated all to charity, maybe. Or an irrevocable trust that is set up to pay her income only. But, she should not worry about her kids college as far as loans and grants go. Personally she sounds a bit overwhelmed.1st - While your friend is having a tough time with the loss of her father, that is no excuse for not looking at reality. It is her life and she is responsible for her families future period. 2nd - Tell her not to do anything with the money right now. She can wait a couple of months. A good investment today should also be a good investment in a couple of months. Hell she can even wait till december during the school break. 3rd - as long as her kids are not convicts they should probably have no problem borrowing money for school. Remind her that no one is going to lend her money for her retirement, but they will lend her kids $ for education, particularly if she co-signs. 4th - If she is unwilling to take on the financial management responsibilities herself, then she needs to find a solid financial planner. I know she is busy, however, remind her she is responsible for her future and her kids to a large degree and sticking your head in the sand is not a wise way to watch lifes road as it comes at you. She can try just about any type of financial institution. She must understand what is going on so she can monitor who ever she hires. She can also see an attorney, I would see one that deals with elder law and estate planning. At least an attorney is supposed to have fiduciary relationship with her. Meaning he is supposed to look out for her best interests. yes it will cost some money, but it is a necessary expense. She can always require her express permission before any money is moved or invested. 5th - Set aside a small amount of money to spend. Something she has always wanted to do. maybe a trip or something or a cruise. Given her amount of $ around 3k - 5k would be appropriate. her father left her that money, I am sure it was not to be a total miser. 6th - She is in a position to set an example for her kids. I would strongly introduce the notion that how she handles this situation will affect how her children view money in the future. 7th - some ideas- does she own a home? if so I am sure there are some capital improvements that could be made - new roof, new a/c. Things that add value. This is an investment so she is not just pissing it away. - if she does not own a home, well she has enough for a substantial down payment on a modest home in a good neighborhood. - is she strapped for cash every month? Maybe pay off the car. - after these she should invest at least 85% or more after she does these things. Generally what I have listed is what we are doing with my money. Put some into the house, paid off one car, Invested 1/3rd with a manager at BOA, will invest the rest myself in stocks and real estate. No we did not pay off any of my school debt. I just consolidated my school loan, over $100k, at 2.77%. Why on God's green earth would I want to pay that off early? That is almost free money. Good luckwarpoet
Her husband died and his income is gone. Read the OP again. It was not the woman's husband who died. It was her father. Therefore, she was already supporting herself and her two children. That's why the OP said she was a single mother.This is really found money for her and is not replacing any lost income on which she had counted. This is a windfall for her and should help her to be able to easily afford college for her children, if that's how she chooses to use it.But I do agree with others that now that she has it, if it means her kids do not qualify for need-based financial aid, then that's because she has the wherewithal to pay for their education. Need-based aid is meant for those who cannot afford it any other way, and from where I sit, someone with $750,000 in the bank can most certainly afford college tuition for her children.But it was not her spouse she lost.
At the age of the bereaved, the inheritance is not a lot of support for the rest of her life, but if supplemental to a living wage is way over. We always say to bereaved that they should not make irrevocable decisions in the first year. Put the money in C.D.s (several) for the ferst year while you get educated about handling money and over the rolly coaster emotional ride from your loss. You can afford to pay for the kids in State schoo;s and not take too big a chunk of the inheritance. You don't have to make the decisions now. Remember, a broker is a salesman, not an investment advisor. If you seek advice, get it from someone who won't profit from your investment (more than a small advisor's fee).
My mistake...I did misread the original post. Thanks for the clarification.
Why is she worried about student loans and scholarships? With this much money she certainly can afford to pay, and let the kids who really need scholarships get them. Wish I had her problem for my grandkids!
WARNING WARNING WARNING! When my brother-in-law died, leaving my sister and her 5 yo son, she was devestated. I believe she actually felt guilt about getting the $100,000 and didn't want to think about investing it lest she look like she was enjoying the "windfall" UGH! She became frustrated and sensitive to any of my suggestions. Her comment to me was "Congratulations, Miss, you won the lottery, but sorry your husband died" Really, she was in no mental state to do financial planning, I regret to say. But a few of her christian friends at the bank had no problem getting her to invest in a "safe annuity". I checked what the broker put her money in, a 80% high-yield (junk) bond fund and 20% money market. I'm ready to slap some religion into that guy!
rneedel: "As a mom who has gotten two girls through college and halfway through our son's educational experience, one thing I can tell her is to make sure she DOES NOT put any money in the kids' names. She can put it into a revocable trust so that it does not show as a personal asset to her."The assets in a revocable trust for which she is the Grantor/Trustor are most certainly her personal assets.Regards, JAFO
From KTS19: Suze Orman suggests a year's wait before serious stock investing after widowhood, death of a spouse or divorce or other traumatic event that results in an inheritance. ----I definitely second that. My MIL passed away several years ago leaving DH and I a decent sum of money. We sat on it for quite some time, mulled various options, got a good financial coach/advisor. It was almost a year before our final allocations were made and by that time we had a very good sense of what financial goal and plan.As far as the original problem, coming from someone who had to work her way through college even with financial aid, your friend should be happy that she has any means to put her children through school and leave what few $$ there are to families who do not have such options. Perhaps if your friend is concerned with spending all of it on an education the kids do not take seriously? I could see that as a possibility...send them to an expensive private school with everything paid for, and the kids not really value the education enough to give their best. I've seen it happen to friends of mine and to other kids who were lucky enough to get a "free ticket".First, she doesn't have to send her kids to an Ivy League or expensive private school. There are outstanding public colleges and universities all over the country that provide excellent educations. Education is what you make of it -- whether you go to the most exclusive private college or to the cheapest state college in your state, a student's commitment to education will ultimately determine its value. Second, If the kids have a real interest in education (and the college grades that prove it), perhaps a solid degree from a state university, followed by graduate work at a more "pedigree" university will be the best usage of college dollars. This way she'll give her kids a good education at reasonable cost, and still have funds to allow them to pursue more advanced study if they truly desire it.Third, I believe that even families with "assets" can be eligible for certain low-interest rate student loans. Speaking with a bank or financial advisor may give you more information. Take the loans and then pay them off upon graduation, or perhaps cut a deal with the kids so that you pay off 3/4 of the loans (or whatever percentage) and they are responsible for the rest. It gives a sense of responsibility for the education that they are getting without crushing them financially when they get out into the real world.Regardless, congratulations on having the options to consider in the first place, and good luck.MR
I think anyone who has $750,000 sitting in an account should be willing to pay for their kids' college without asking for scholarships. Scholarships should be available for poor kids who would have no other way to pay for their education. Tell your friend not to be greedy.
Remember: FDIC insurance is limited to $100K per person per bank,Not per bank. It's "per all identically titled accounts at one bank (all branches put together)". There are ways to title accounts differently, such as "Mom's Money Market, Payable On Death to Kid #1" is a different title than "Mom's Money Market", but "Mom's CD" is the same as "Mom's Checking" banks are always merging (which makes it harder to remain diversified among banks),Good point. Sometimes banks merge and don't bother to change names. You have to keep up with that.FDIC insurance doesn't cover interest,False, and absolutely ridiculous. If you've earned interest at a bank, the interest is most certainly covered by the FDIC, as long as your total balance is still below $100,000.and (most importantly) it's better to not rely on the FDIC anyway. If your bank fails, your money is frozen and earns NO interest during the weeks or months it takes to collect from the FDIC.Sometimes the FDIC pays up in a day; sometimes it takes longer. It depends on whether the FDIC gets wind of the failure in advance. But most often, your accounts are sold to another bank.
In this day and age, it's probably not smart to try and hide money for any purpose. The legal liabilities far outweigh any advantages if you get caught.The kids are teenagers and I would guess they or she must have some idea where they might want to go to college. It should be easy to check current tuition costs and do some reasonable extrapolation as to how much future tuition might be. There is a lot of information about what college costs including tuition, living expenses, etc, might be. Most states have 529 plans and she could open accounts for each of them using that vehicle. The accounts will earn interest until and after they go to school until the money is withdrawn for legitimate school expenses. Some schools have prepaid tuition plans and she could look at those if they have a good idea of where they might want to go.If the kids are smart or gifted in some area, they will still qualify for performance based scholarships and grants. They just won't be able to take advanted of need based programs. And I guess I don't see that there is a need at this point unless she blows all of the money.I assume she wasn't dependent on her father for support, so this is, in fact, a windfall and she should view it as such. To better secure her financial future, after providing all or some of the kids educational needs, she could pay off her home loan and any car loan and any other consumer debt she might have in order to keep more of what she earns. If she doesn't own a house, she could buy one and either pay cash or put enough down to have a payment less than or equal to her rent today.After that, short term she should look at MM's or CD's, even if it's just through her own bank at this point, until she can visit with a qualified financial planner to help her create a strategy for the future, including retirement, with whatever is left.$750,000 is a lot of money but it doesn't make one independenty wealthy. She should secure her kids education honestly, not fraudulently, get rid of most of her debt and then get some help on what to do with the rest.Mike
Just to address the FDIC insurance concerns. There are banks which will spread a large lump sum of cash into smaller accounts at their and other banks so each account is under the FDIC limitations. BofA will do this, and probably other banks as well.
Just to address the FDIC insurance concerns. There are banks which will spread a large lump sum of cash into smaller accounts at their and other banks so each account is under the FDIC limitations. BofA will do this, and probably other banks as well. I would really question this. My experience is that it is not the individual account that is insured to the $100k limit. It is the individual SSN on the account that is insured to the $100k limit. So if you have 4 accounts each worth $25k under one SSN, then you're at the $100k limit.The only way around the limit of which I am aware is to use different SSN's, so you could have one spouse as the primary SSN on one account and the other spouse's SSN on a different account.I believe there are banks that may actually do it as described above where the accounts are each insured, but as this can be done several ways, if it is an area of concern, then the depositor should really ask and understand how it is handled at that particular bank.
Banks know a lot more about the details than I. However, I believe it is the title of the account that is importan, not the SSNt. For example, a couple can protect $300k in 3 accounts as follows: 1-Husband, 2-Wife, 3-Husband and WIfe. I also know they will place your money in several banks to achieve the goal.
Don't know the financial status of your friend prior to receiving the life insurance money. For all of us looking at it via the internet, we are able to be very sensible; many of us have a fair amount of financial experience, some of us probably have at least a little envy (unlikely my parents will leave me anything as they think I'm a terrible person).However, as someone who grew up in a very frugal (of necessity) family and who lived very frugally (of necessity) for a couple of years as a teacher, your friend may be so accustomed to worrying about how to pay for her kids' college (among other things) that her experience simply does not allow her to conceive of the idea that paying for college does not need to be problem now. All she knows it that it impacts her plans, and that means it's a problem. Not logical, but who said humans were logical?? (This is similar to the way people who lived through the Depression view things--stocking up food, saving everything, pinching pennies till they scream--no matter how comfortable they are now.)So trying to do a little extrapolating from the information given, your friend needs sympathy and comforting as she grieves her loss, and reassurance that you are going to help her figure out the college thing: that the bottom line is that her father has left her pretty well-provided for. As she becomes ready to hear it (gentle pushing may be in order), sit down and show her what a mere 3% (money market or similar account) comes to on this amount of money. (Regardless of her math skills, don't assume that she'll have already done this!) Coach her through something like http://www.independent529plan.org/ --she could buy 4 years tuition at MIT for both her kids (assuming putting in $150K/kid today--there are some special rules for doing this, although not something I've researched heavily since it's not an option for us) and still have $450K left, which, put into some conservative MMA's, would still give her at least an extra $10K/year without touching the principle. As she gains some level of comfort in talking about large sums of money, she probably will want to see about finding a good financial professional (lawyer, accountant, advisor--depends how she wants to go about things).My guess is it's going to take your friend some time to comprehend what can be done with a lump sum of this magnitude--it gives her and her kids a tremendous amount of flexibility, but it's going to require that she learn about a lot of stuff that she probably never considered even remotely useful before. Just my .02 on this topic. My best to your friend.Kathleen
...assuming putting in $150K/kid today--there are some special rules for doing this, although not something I've researched heavily since it's not an option for us.OOPS!!! Combined parts of a couple of numbers. Max is $55K per individual who wishes to contribute, $110K for a couple. The 55K comes from a special 5-year averaging thing for the $11K limit on gifts.Sorry about the error. Still a significant potential for paying for school.Kathleen
Thanks for bringing up the 529.While busily "sheltering" assets, I foolishly gave 'control' of some funds to my brother. Now that his 1.75% 2yr CD has matured, I'm having the devil of a time convincing him to open a couple of 529s for my Nieces. I hate CDs! Although he did sign up with www.upromise.com to get kick-backs for college (from every day living), (s)he needs to fund one of the numerous 529 plans offered to maximize the benefits. I prefer the Vanguard's age-based plan and am happy to let them adjust allocation when necessary.My Brother believes he must commit $50/month, which wouldn't be a bad thing in and of itself, but he is in error. I favor the initial funding of $55,ooo (single individual) or $110,ooo (married couple) then I can spend the next 5 years dreaming of other ways of increasing wealth. While its not likely he'll reach the maximum contribution of $250,ooo (max varies according to state/plan) per beneficiary, the 529 has the advantage of changing beneficiaries as circumstances change. Also, the money earmarked "education" can't be 'borrowed' to help finance a new car.I read an article, through the Foolish pages, of a young woman investing her inheritance in a ROTH IRA. Ended up a millionaire!!!Mother always said, "pay yourself first." I'm a little late to the game, but Vanguard also holds my ROTH account. Now I'm trying to convince my Brother to get the nieces started with their own IRAs, limited by their "earned" income. As I often tell DH, "A million dollars isn't what it used to be." Since the subject came up in earlier postings I will add that, in addition to buying a (furnished) Condo for my sister, I "splurged" on my self and bought a much needed washer/dryer.
I'm going to take the contrary view to just about everybody else on this thread.Financial aid is a system, like many other systems. There are rules to follow. Some of the rules make sense, while others don't. But there is nothing unethical about looking through the rules to see if there are things you can do to get a better situation. With a fixed lump sum of money that may have to last a lifetime, it's critical that a grieving family do everything it can to get a firm grip on their finances as quickly as possible.Is it unethical to set up a bypass trust for your spouse? By doing so, you potentially reduce or eliminate estate taxes. Is it unethical to buy equipment for your business simply because there are provisions that allow you to deduct the cost immediately? Of course not. Most of the posts seem to think that there's no way this person could get financial aid without doing so under false pretenses, and that's just ridiculous. The July 2005 issue of the Journal of Financial Planning has an excellent article on the huge variety of college planning considerations. The article states that all other things being equal:- Increasing parental income reduces awards;- Increasing parental net worth reduces awards, but not as quickly as income;- Increasing student wealth reduces awards more quickly than increasing parental wealth; and- Increasing home equity has no effect on the federal aid formula, although individual colleges might take it into account.http://www.fpanet.org/journal/articles/2005_Issues/jfp0705-art6.cfmIn addition, there are some other complicated rules that don't make a lot of apparent sense. The two types of 529 plans are treated differently: 529 prepaid tuition plans are not considered an asset, but 529 savings plans are. I have heard life insurance agents say that money held within life insurance policies is not considered as an asset; they then try to sell universal variable life policies as a way of obtaining investment returns packaged inside an exempt life insurance asset. Similarly, retirement funds may get preferential treatment.There's a website designed to help you maximize awards:http://www.finaid.org/fafsa/maximize.phtmlThis site makes it clear that there's a distinction between hiding assets and sheltering assets. The rules let you shelter assets. In my opinion, there's nothing wrong with using the rules to your best advantage.You can also check this site:http://ifap.ed.govalthough it's geared more toward financial professionals and seemed a lot more difficult to navigate than the finaid.org site.Finally, keep this in mind: $750,000 may sound like a lot of money, but we don't know the purposes for which the insurance was bought. If the sole purpose was to pay for college for the kids, then it should be plenty. But if it was meant to support the surviving spouse for life, it's important that as much of those funds as possible be preserved not only for kids' college but for the surviving spouse's own living expenses.dan Dan, you are correct about all of this ... well except for two things. The first, which another posted has already pointed out, is that it was her father who died. The woman did indeed receive a windfall. The second is that you forgot to point out the zero-sum nature of this system. There is only so much that colleges can give away in merit-based scholarships and need-based aid.Every dollar awarded to any of this woman's kids is a dollar that another kid does not get. Like with a lot of posters here, I wholeheartedly agree that her kids are not in need and therefore should not be getting any need-based aid. That said, I do see a grey area here. Think of it this way"A" (like our woman) has $750K in cash, but $0K in a retirement account"B" has $10K in cash, but $740K in a retirement accountThe way colleges see these people, "A" can afford to spend x% of $750K on kids' education. If that x% is 5%, then "A" can afford to spend $37,500 that year on kids' education. Likewise "B" can afford to spend 5% of his cash that year, which is only $500. Although, in this case you can still argue that B EARNED his/her $750K, whereas A's $750K was a windfall. Nevertheless - I have no problem if "A" manages his/her windfall in such a way that decreases his/her tuition liability if it makes A in a stronger financial position. By this, I mean, putting the maximum into a retirement account, eliminating debt, and/or buying a house. If, on the other hand, "A" buys a $200K boat and then balks at kids' $200K tuition bill, then I hope that "A" goes to hell.
I just hit reply on the last post I read...Someone above was right: $750,000 isn't all that much money for everybody. She may be counting on this money to get her through the rest of her life.I have a question: what are the rules regarding financial aid for students whose parents refuse to pay for their college? I remember some girl years ago who was upset because her parents wouldn't pay for college, but they had good incomes so she had a devil of a time getting any Financial Aid. I think she said she had to be off her parents' income taxes as a dependent for a certain number of years, first. (And, I think her father kept putting her on them, even though she no longer lived there.)Anyway, what are the rules regarding such things? Can her children perhaps attend a community college for a year or two while she A) pays costs and B) doesn't claim them as dependents so that they can transfer to a university and apply for financial aid based on their own incomes and assets?There's no law, really, that says you have to pay for your children's college educations, although I think many people would find that idea repugnant.
There's no law, really, that says you have to pay for your children's college educations, although I think many people would find that idea repugnant.Nope, there's no law. But there's also no law that says your kids have to go to college, either. Kids can file for legal emancipation. But, if it's just a scam and they're actually being supported by the parents, I think it would be fraud; probably against either the state or the US government, or both. Not something you'd contemplate doing if you're smart.Hedge - who doesn't even play a lawyer on TV
I have a question: what are the rules regarding financial aid for students whose parents refuse to pay for their college?There are rules developed just because people tried to game the system. From www.finaid.org :An independent student is at least 24 years old as of January 1 of the academic year, is married, is a graduate or professional student, has a legal dependent other than a spouse, is a veteran of the US Armed Forces, or is an orphan or ward of the court (or was a ward of the court until age 18). A parent refusing to provide support for their child's education is not sufficient for the child to be declared independent. rad
There are rules developed just because people tried to game the system. From www.finaid.org :An independent student is at least 24 years old as of January 1 of the academic year, is married, is a graduate or professional student, has a legal dependent other than a spouse, is a veteran of the US Armed Forces, or is an orphan or ward of the court (or was a ward of the court until age 18). A parent refusing to provide support for their child's education is not sufficient for the child to be declared independent. rad All good rules in my opinion.
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