Fortunately, inheritances are not a common financial event; but they sure can create some confusion for the FAFSA and CSS Profile processes. Most parents and students assume that because money is received from an inheritance, it must be income. This is not necessarily true.
First, you should be aware that neither the FAFSA nor the Profile list inheritance as income. There are those general questions, like on the FAFSA, which asks for all income not recorded elsewhere on this form and includes the example of having bills paid on behalf of the student. However, there is no more detailed description of what that income could be. If you search the FAFSA and government student aid websites, you won’t find any mention of inheritance, except as a brief example of a student whose financial picture changed over the summer and then may not want to borrow as much money as before. If you search the websites related to the profile, the only inheritance context concerns the valuation of the inherited assets.
So, in other words, the FAFSA and Profile are silent on inheritance. In such a case, the smart money is to trust the recognized authority to define income. This is usually the Internal Revenue Service (IRS). The IRS does not define inheritance as income.
So how does inheritance affect a student’s financial aid applications on the FAFSA or CSS Profile? They affect filings through the valuation of student and parent assets and the income generated by those specific assets while in the possession of the immediate family. That income could be capital gains, dividends, or interest earned.
For example… A grandparent passed away in June 2009 leaving $250,000 in cash to the parents and $15,000 in cash to the student. This inheritance would not be reported in any income column on the FAFSA. However, at the time of filing the FAFSA form in February 2010, the father still has $200,000 of the estate and the student has $5,000 of the estate remaining. These assets will be reported on the FAFSA form as savings or investments. In addition, the parent’s $200,000 earned $1,000 in interest for half the year, and the student’s $5,000 earned no income. The $1,000 in interest will be reported as interest income on the FAFSA.
Please note that some colleges and universities may consider inheritance as income for their individual forms. Double check those forms before assuming the above guidelines apply to institutional paperwork.
