| AwardYear: 1996-1997 ChapterNumber: 4 ChapterTitle: Discretionary Verification Section: Verifying Assets PageNumber: If you have reason to believe the student and/or spouse and/or parent(s) owns assets that have been incorrectly reported or were not reported, the first appropriate step would be to examine the tax returns of the parties involved. (See Chapter Two for a more detailed discussion on using tax returns and related documents.) [[The chart "A Tip for Verifying Assets" on page 50 is currently unavailable for viewing. Please reference your paper document for additional information.]] Excludable Assets You may find assets reported on the tax return that you will not find on the FAFSA, which is appropriate, as certain assets are excluded from consideration when determining federal student aid eligibility. Assets reported on the FAFSA should NOT include, for example, a principal residence, certain types of farms (see the discussion later in this chapter), the value of retirement plans, or cash accounts to which access is denied due to a state's declaration of a bank emergency. Changes in Asset Value Assets must be reported in terms of their total value as of the day the applicant signed the FAFSA. It is inappropriate to change an asset's value (or to eliminate an asset originally reported) because that value has changed between the time of application and the time of verification. Assets should be corrected only if they were reported incorrectly at the time of application. (If assets have been depleted since the time of application, causing the applicant undue hardship or significantly changing his or her financial situation, you may choose to make a professional judgment adjustment. For details on professional judgment, see the Counselor's Handbook.) Assets Held in Partnership If assets are held jointly or by a group, the applicant and/or the spouse (if applicable) and/or the dependent applicant's parent(s) should report only the portion of assets he or she actually owns. Debts on such assets should be reported in the same proportion. Cash and Bank Accounts An application should include all cash and bank accounts held by the applicant and/or the spouse (if applicable) and/or the dependent applicant's parents. The accounts must be reported in terms of their value on the day of application. IRS Form 1040 Schedule B reports account and investment information. JOINT OR CUSTODIAL ACCOUNTS. In the case of a joint account, each holder should report only 50 percent of the account value. Custodial accounts parents or grandparents establish should be reported as the applicant's assets. TRUST FUNDS. Generally, a trust fund must be reported unless a court order restricts the fund's assets to non-educational use. The trust MUST be reported as an asset even if the applicant won't receive any proceeds or distributions of the trust during the award year. (See the Counselor's Handbook for information on reporting the present value of a restricted trust.) TUITION PREPAYMENT TRUST FUNDS. Several institutional and state programs, such as the Michigan Education Trust (MET), allow a trust fund to be designated specifically for tuition prepayment. In keeping with the Higher Education Act of 1965, as amended, such tuition prepayment plans must not be reported as assets for federal student aid purposes. (The annual value of the tuition prepayment should either be used to reduce the student's cost of attendance or be counted as estimated financial assistance.) Investment Value and Residental or Commercial Property Items of investment value should include investment partnerships; money market funds; mutual funds; certificates of deposit; stocks, bonds and other securities; installment and land sales contracts; commodities; and precious and strategic metals. [["Principal residence" defined for military families]] The value of the principal residence should not be reported on the FAFSA. For those in the military, "principal residence" may need clarification: If the family lives on a base and owns a home elsewhere, WHICH IT DOES NOT RENT OUT, that home is the principal residence and is not considered an asset. It is the home to which the family will return when military service is completed. For example, a family living on a base in Texas owns a home in Virginia. The family is not renting the Virginia home, and it produces no income by any other means. This home is considered the family's principal residence because a military assignment is the only reason they are living elsewhere. Even if the family lives off base in Texas and rents a house nearby, the home in Virginia is still the principal residence because the family plans to return and live there. The current market value of any residential or commercial property OTHER THAN THE PRIMARY RESIDENCE is reported on the FAFSA. (The current market value is the amount for which the property could be sold as of the date the application was signed.) Property to be reported should include vacation homes and rental property. As discussed later, the family's farm and business assets should NOT be included. A Tip for Verifying Real Estate Value The following documents may be useful: - IRS Schedule A (mortgage interest paid) - IRS Schedule B (interest/dividend income) - IRS Schedule D (investments sold in base year) - IRS Schedule E (property income, trusts, and partnership holdings) You may be able to verify the value of certain property with appraisals, tax assessments, mortgage statements, or an affidavit from a real estate office or hall of record. Also, if the property was used for collateral on a loan, its value can be documented with the promissory note from the loan. RECENT APPRAISALS. Appraisals are the most accurate verifiers of value because they give a good ESTIMATE of the current market value, but they are generally expensive and not routinely available. If you have access to an outdated appraisal, you may be able to use it to estimate the current value, as discussed later. TAX ASSESSMENT NOTICES. These notices are the most common and readily accessible documents for verifying property value but must be used with caution because the information will vary greatly depending on location. For instance, in some areas a percentage of the market value will be assessed, while in other areas a percentage of the tax value is assessed, usually at a lower rate than the true market value. If you wish to use a tax assessment notice, you must know exactly what the assessment rate is for the property's location and how you can use the assessment notice to determine the true market value of the property. [[Using the Multiplier Tables]] MORTGAGE STATEMENTS, AFFIDAVITS, AND PROMISSORY NOTES. If you use a mortgage statement, an affidavit from a real estate office or hall of records, a promissory note, or an outdated appraisal, the value given for the property will most likely be outdated. However, you can arrive at a gross estimate*11* of the current market value by using the Housing Index Multiplier Table or the Commercial Property Multiplier Table found on pages 56 and 57, respectively. The housing table should be used for residential property only (other than the principal residence); all other property value should be assessed using the commercial property table. Using the tables is easy; simply multiply the property's value by the multiplier's value for the year of the valuation. The multiplier indexes should NOT be substituted for reported values in order to maximize or minimize need ACROSS THE BOARD for the EFC. (Of course, you may use your discretion to adjust reported value to more accurately reflect an INDIVIDUAL'S financial circumstances.) The multiplier tables are based on national averages. Market values vary from region to region. The value obtained is an ESTIMATE; you should use it only as a guide for evaluating the reasonableness of the value reported. If the applicant claims the property value is much lower than that calculated with the tables, the applicant should provide a reasonable explanation for the low market value, for example, fire or other damage. Remember, the actual value may also be much greater than the estimated value. Residential Property, Commercial Property, or Investment Debt The amount reported should include all unpaid mortgages as well as unpaid property improvement loans and any other loans for which the property is used for collateral. (An IRS lien does not reduce the property's equity and, therefore, should not be reported as a debt against the property.) Property and investment debt can be verified with a monthly mortgage statement or a statement from a mortgage company, accountant, or lawyer. Business Value The application should show the current market value of the business (the amount for which the business could be sold) as of the date the application was signed. Business value would include the value of land, buildings, machinery, and equipment. If the applicant owns a partial share, only the value of his or her share should be reported. The value of land and buildings can be verified with a statement from a real estate office, accountant, or lawyer. The total value of the business can be verified with a statement from an accountant or lawyer, or by a copy of a promissory note for a loan for which the business was used as collateral. Purchase agreements and inventory assessments may also be helpful in this verification. The CURRENT value of land and buildings can be derived from an outdated value by using the Commercial Property Multipliers, as described on the previous page. Again, because the multiplier gives an estimated value, it should be used as a guide for evaluating the reasonableness of the reported value. A Tip for Verifying Business Value The following documents may be useful: - IRS Schedule C (business profit/loss) - IRS Form 4562 (depreciation) - IRS Form 4797 (capital gains/losses) - IRS Form 1065 (business partnerships) Business Debt The amount reported should include the unpaid mortgage and related debts, as well as any loan for which the business assets were used as collateral. If the applicant or parent owns only a portion of the business, only his or her share of the debt can be reported. To verify business debt, you can use a copy of the mortgage; a statement from the mortgage company, from an accountant, or from a lawyer; or copies of notes for loans against the business. (If an applicant claims a large business debt but reports little or no interest payments, you may want to investigate further.) Farm Value [[Incorporation of family farm]] The value and debt of a family farm should not be reported on the FAFSA. For student aid purposes, a family farm is the family's principal residence and, in most cases, meets the criteria set forth in IRS Schedule F (the family materially participates in farm operation). In certain instances, however, even if the family farm is incorporated and the family files a corporate return instead of IRS Schedule F, the value and debt of the farm are not reported on the FAFSA. In such cases, the applicant must show evidence that family members own all shares of stock in the corporation AND that those family members also reside on the farm. A farm that does not fall into one of the categories above must be reported at its current market value (the amount for which the farm could be sold) as of the date the application was signed. Farm value would include the value of land, buildings, machinery, equipment, livestock, and inventories. If the applicant or parent owns only a portion of the farm, only his or her share of the farm's value can be included. The value of land and buildings can be verified with a statement from a real estate office, accountant, or lawyer. You can verify the farm's total value with a statement from an accountant or lawyer or by checking a copy of a promissory note for a loan for which the farm was used as collateral. Purchase agreements and inventory assessments are also useful in verifying farm value. Farm Debt The amount reported should include the unpaid mortgage and related debts, as well as any loan for which the farm assets were used as collateral. If the applicant or parent owns only a portion of the farm, only his or her share of the debt can be reported. To verify farm debt, you can use a copy of the mortgage; a statement from the mortgage company, from an accountant, or from a lawyer; or copies of notes for loans against the farm. (If the applicant reports a large debt but paid little or no interest in 1995, you may want to investigate further.) [[The 1995-96 Housing Index Multiplier Table and the 1995-96 Commercial Property Multiplier Table found on pages 56 and 57, respectively, are currently unavailable for viewing. Please reference your paper document for additional information.]] *11* Any amount established in this manner should not be arbitrarily considered a "minimum" or "maximum" but should be used to evaluate the reasonableness of the applicant's data |