Inheritances are not a common financial event, thankfully; but they sure can create some confusion for the FAFSA and CSS Profile processes. Most parents and students assume that because money is received out of an inheritance it must be income. This is not necessarily true.
First of all, you need to be aware that neither the FAFSA nor Profile mention inheritances as income. There are those catch-all questions such as on the FAFSA which asks for all income not recorded else where on this form and includes the example of having bills paid on the student’s behalf. There is however no further description of what that income might be. If you search the FAFSA and government student aid websites, you will find no mention of inheritances 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 Profile related websites, the only context of inheritance is regarding the valuation of inherited assets.
So in other words, the FAFSA and the Profile are silent regarding inheritances. In such a case, the smart money is to rely upon the recognized authority in defining income. This is typically the Internal Revenue Service (IRS). The IRS does not define inheritances as income.
Then how do inheritances affect a student’s financail aid filings on the FAFSA or CSS Profile? They affect the filings through the valuation of students’ and parents’ assets and the income generated from 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 dies in June 2009 and leaves $250,000 to the parents in cash, 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 parent still has $200,000 of the inheritance and the student has $5,000 left of the inheritance. These assets will be reported on the FAFSA form as savings or investments. In addition, the parent’s $200,000 generated $1,000 in interest for half the year, and the student’s $5,000 did not generate any income. The $1,000 in interest will be reported as interest income on the FAFSA.
Keep in mind, some colleges and universities may consider inheritances as income for their individual forms. Double check those forms before assuming the guidelines above apply to institutional paperwork.