Inheritance affecting student loan payments?
August 29, 2016 8:33 AM   Subscribe

A few questions about an inheritance affecting student loan repayments and disclaiming an inheritance.

I know you're not my tax attorney but...

TL:DR backstory - my parents have a history of poorly managing their money and subscribe to the 'do what's easiest without thinking it through' financial model. Some of their decisions have adversely affected my credit. Still, they are repaying part of my student loans (in their name) for which I am very grateful. That said, I don't always trust what they tell me when it comes to money...

Current story (it gets a bit shady): my grandmother passed away in February and left my father about $150k. I got a call from my parents last night and they explained that if they accept the inheritance, the amount of their income based repayment of the student loans will increase. So their convoluted plan to avoid this is as follows: my father writes a letter to the executor of the will disclaiming the inheritance. My siblings and I then write similar letters also disclaiming it. And somehow the money ends up in a shared account between my brother (rich lawyer) and my parents.

However, the IRS does not consider an inheritance to be income, but does calculate income tax for any interest on the inheritance. I asked this to my parents and they said their student loan repayment plan is 'asset based'. Is there such a thing? This seems kind of strange to me and I asked if there is another reason they are disclaiming the inheritance, but they said no.

Will my part in this - disclaiming the inheritance that my father disclaimed - affect me in any way? I have upcoming plans to apply for a loan to invest in my business and have been working hard to make sure my credit is clean.

Any insight?
posted by AutoPilot83 to Work & Money (20 answers total) 1 user marked this as a favorite
How much are your student loans? Why not use the windfall to pay them off completely? If it's understood that the loans are yours, but in your parents' name for accounting purposes, you can continue to pay them back on schedule.
posted by Sublimity at 8:55 AM on August 29, 2016

"And somehow the money ends up in a shared account between my brother (rich lawyer) and my parents."

I have no idea what the "somehow" is supposed to be, but this is so inherently fishy - and apparently specifically designed to give the lender a false sense of how much $ your parents have - that you should avoid being any part of it.

I am not your lawyer.
posted by sheldman at 8:56 AM on August 29, 2016 [4 favorites]

For what it's worth: I inherited about $85K, and did not have to pay one cent in income tax on it. Not sure what the cutoff is above which you might have to pay tax, but I think it's something in the neighborhood of $250K --- check with your own tax accountant, lawyer or even the IRS code to be sure.

And if your parents formally refuse to accept the inheritance, it might possibly end up in your brother's name (assuming Brother does not disclaim it, while you and other siblings do), but it would not end up in an account shared with your father --- he just disclaimed it: refusing to accept something does not mean you get it anyway!

Hoo boy, you need your own, not your parents' or your brother's, lawyer on this, otherwise it sounds like you're about to be screwed over. Maybe your school has a legal aid office for students?
posted by easily confused at 9:02 AM on August 29, 2016

"Step Three:Profit!"

As everyone else will suggest, you need your own lawyer.
posted by Marky at 9:06 AM on August 29, 2016 [3 favorites]

IANYL. There are way too many missing details to hope to answer any of your questions here, but here's how I would go about it if I were in your situation:

I asked this to my parents and they said their student loan repayment plan is 'asset based'. Is there such a thing?

You should ask your parents for the details, in writing, of their income-based repayment plan for your loans. I mean, it's great that they are paying them for you, but to the extent that they are asking for your participation in their schemes you have a right to the full picture.

If you want to check up on the viability of the current scheme, you should also ask to see a copy of your grandmother's will. Basically it sounds like the terms are $150k to Father, and if not to children of father, and if not to...XX, where XX is somehow a "joint account" between your brother and parents. Maybe it's a trust of some sort?

If "rich lawyer" Brother is on board with this scheme, and you believe him to respect the law, it's safe to assume that it's legal -- BUT it seems like maybe this scheme works out in Brother and Parent's favor, but not in yours? I also think that the best thing to do with the windfall is to wipe out as many outstanding debts as possible (including your loans). Then again, it seems like this is Father's inheritance, and therefore his to do what he wishes with it.

I would though, also ask what Parents and Brother intend to do with the money if it's not debt repayment. Maybe you can convince them skip this disclaimer business.

Will my part in this - disclaiming the inheritance that my father disclaimed - affect me in any way? I have upcoming plans to apply for a loan to invest in my business and have been working hard to make sure my credit is clean.

If they insist on the disclaimer, I think you should seek professional advice. If you have a business, you should have a accountant who is fluent enough in tax law to help you answer this question. Otherwise, consulting a tax attorney for you or your business would be wise to get a definite answer to this.
posted by sparklemotion at 9:10 AM on August 29, 2016 [1 favorite]

Response by poster: I realize the details are sparse - I'm still extracting information from my parents. Fun!

I've been out of school for a while and making good progress at paying back my part of the loans. The model we used for my student loans incorporated an increasing percentage of money that was taken out in my name (as opposed to my parents) as each semester passed. I'm not to upset about paying 2% interest on my portion. I don't know exactly how much of the money taken out for my education they still have as principal. I'll also say that them not paying their part of the loans will not affect me - although I'd like to keep them out of debtors prison (do we still have that?)

Sheldman - it's exactly that: my parents trying to get the money without anyone knowing they got the money. Something I'd rather not be a part of.

Sparklemotion - I think all this disclaiming business is separate from what the will stipulates. It's similar to the chain of inheritance if my father had predeceased his mother. And I have absolutely encouraged them to use the money to pay off debts. I think the only reason for the joint account with my brother is that they live close to each other - my brother A) doesn't need the money and B) wants them to be more financially stable. He wouldn't be benefiting from the money.
posted by AutoPilot83 at 9:18 AM on August 29, 2016

I would suggest thinking of this first as a family-dynamic issue, not a money issue. And then maybe (depending on the facts) as a money issue bigger than this one question.

The immediate money issue is easy: why should you disclaim an inheritance? You shouldn't, unless anyone gives you a strong legal opinion that it is actually (paradoxically) in your best interest to do so and in a perfectly lawful way, or gives you a strong moral explanation that it is actually (paradoxically) the morally right thing to do. Especially not if (as here) there is any hint that the people asking you to do that are asking it for their own, perhaps-shady, reasons.

When you say "no" your parents may be disgruntled and that may cause problems for you - financial or otherwise. It is hard to know from your question how bad the family dynamic is, and how many financial problems they have already caused you. But I know of some families where the parents have taken out student loans "for" kids but have actually used the $ for their own purposes. If this is what your parents did, or something like it, then screw them. And get a lawyer/accountant not to advise you on this inheritance thing but on how to make sure that the debts they incurred are their problem rather than yours in all respects.
posted by sheldman at 9:21 AM on August 29, 2016 [2 favorites]

So their convoluted plan to avoid this is as follows: my father writes a letter to the executor of the will disclaiming the inheritance. My siblings and I then write similar letters also disclaiming it. And somehow the money ends up in a shared account between my brother (rich lawyer) and my parents.

So here's a possible scenario that's fairly common and tracks the facts you've given: All the individual beneficiaries disclaim, so their inheritances remain in the estate, from which they are then poured over into a trust ("shared account") established by the deceased for the benefit of your brother and your parents.

I can't imagine how it would benefit you to disclaim your inheritance. You need your own legal counsel before you consider doing that. Also it sucks if there's some part of the will that benefits your brother, but not you.
posted by JimN2TAW at 9:31 AM on August 29, 2016 [3 favorites]

Sorry, is this in the U.S.? The federal student loan repayment plans do not look at assets at all, only at your income as reported on your tax returns. And the amount inherited here is not generally high enough to be reported on your parents' tax returns. But I don't understand how your parents could even be on a repayment plan. Parent PLUS loans are explicitly excluded from most of the income-driven repayment plans. (There's one plan, "income-sensitive repayment," that they might be on, but (a) that is also not asset-based and (b) it's so rare I've never met anyone enrolled in it.)

If this is indeed in the U.S., I don't know whether this is incompetence or a scam on their part, but I would not agree to this scheme. Whatever's going on, you don't want to be a part of it.
posted by praemunire at 9:39 AM on August 29, 2016 [9 favorites]

I did some googling and I think that maybe I understand what your parents are trying to do.

This is what I think is happening:
They owe $X in a Parent Plus type loan taken out for you. They are doing some kind of IBR that keeps the payments low, because otherwise their income is quite low (maybe zero?). If they are managing their "income" appropriately, they may not be making payments on it at all. They might even be planning to ride out the 25 (or whatever) years and get the rest of the loan forgiven, or (sorry this is morbid) they may be planning to pay the bare minimum until they die, as then the Parent Plus-type loan will be discharged. Take a look at the answers on this Reddit thread about maintaining $0 income but getting a huge inheritance. The big difference in this scenario is that if your parents pass before the 25 years is up AND they've managed to avoid building an estate, it seems like the death discharge would not have any tax consequences (b/c there is no estate to tax).

The $150,000 inheritance wouldn't count as income, but the interest from investing it would. Because [reasons such as those above], Parents and Brother would prefer to hold onto the $150k instead of paying the debts.

If parents accept the $150k in their name, and invest it, they'll be seeing additional income, which might increase their IBR payments (which they want to keep at minimum, if they truly intend on not paying the full balance).

If brother accepts the $150k in his name (because everyone else has disclaimed), and makes a handshake agreement with parents to use it for their benefit, he can invest it and take the hit on his taxes which might work out better for the family overall than increasing the IBR payments.

If parents accept the $150k and gift it to brother to invest, gift taxes will ensue (not great).

So it seems like the plan is for brother to accept and invest the income, and use it to pay expenses for your parents under the table. This seems like it could be the best option for your parents financially, but it is most definitely shady (to the point where I am wondering if it's only "legal" in the sense that your brother and parents are unlikely to get caught), and involves putting a great deal of trust into Brother.

To be honest, regardless of legality and without knowing the numbers involved, this seems like the kind of pennywise-poundfoolish scheme my inlaws do to try to avoid some (relatively minor) tax hit which ends up hurting quite a bit more in the long term as far as forgone interest and the like. But, if it works out, they might be able to get away with basically not paying anything on your student loans.

My advice to you is pretty much the same as it was before. Get the necessary documents, find out what your Parent's plan is, make sure that they understand whether it really is the best plan for them, and consult your own lawyer.
posted by sparklemotion at 9:49 AM on August 29, 2016 [1 favorite]

If parents accept the $150k and gift it to brother to invest, gift taxes will ensue (not great).

Also, unless the parents have already made massive gifts, this isn't true, either. A gift of that size should be covered by the lifetime gift exemption. So if the parents wanted to accept the inheritance and then immediately make it over to the brother, it's unlikely they'd be incurring any gift tax.

If they really are somehow on an income-driven repayment plan and are concerned about extra income, all they have to do is stick the $150K in a savings account or some such. An account that pays 1% will yield all of a whopping $1500 a year in interest income.

It's not so much that the scheme they're proposing is inherently illegal, it's that it's so baroque and hard to justify that there must be some underlying intention that hasn't been explained to you. And that may well be shady (or misguided).
posted by praemunire at 10:05 AM on August 29, 2016 [1 favorite]

Have you spoken to Rich Lawyer Brother about this to get his take on it? This just seems like so much convoluted effort to go to for minimal return. The interest on 150K invested conservatively is probably not more than $6K a year, so likely wouldn't have a tremendous impact on their repayment plan.

I am beginning to wonder if Rich Lawyer Brother even knows about this plan.
posted by The Elusive Architeuthis at 10:29 AM on August 29, 2016

Response by poster: The Elusive Architeuthis - My brother does know about the plan. We spoke really briefly and he said 'it's not a big deal'. Hmmm.

Sheldman - There has been other financial friction between me and my parents before this issue and what hurts me most is the feeling of lack of disclosure. I want them to make good financial decisions but I want them to be honest with me as well.

Thank you all for the advice and information.
posted by AutoPilot83 at 11:13 AM on August 29, 2016 [1 favorite]

I find it sometimes useful, in these sorts of situations, to look first at: "Assuming everyone has the best of intentions, how can this still go horribly off the rails?"

Let's assume your brother is 100% on the up and up, and takes this inheritance with the intention of letting your parents only access the money.

Who is HIS heir? What happens if, God forbid, your brother passes? The money, legally his, legally passes to someone else, who would be in an enormously good position to say "Um, no, this is my money, and handshake deals to evade the IRS aren't legally binding."

And that's if everyone is 100% on the up and up.

Honestly what it sounds like is that your brother doesn't trust your parents to manage a 150K inheritance, and is taking on the management of it to make sure they don't spend it on blow.

What is your relationship with your brother? For me the part that is raising eyebrows and red flags is that your brother hasn't talked to you about this in detail, but still wants you to reject your inheritance.
posted by corb at 11:34 AM on August 29, 2016 [4 favorites]

I want them to make good financial decisions but I want them to be honest with me as well.

I think this is key (and sheldman hit on it above as well). Because I haven't heard anything to makes me think differently, I assume that your parents mean well, and helped you pay for your schooling because they wanted to give you the best opportunities to succeed. This is an awesome thing that many parents do.

Where it seems to maybe be going wrong is that this should have been a "gift" (in the interpersonal, not legal or financial sense of the word), but it seems like they feel entitled to direct some of your financial choices because "we took this loan for you." Because of this, you've ended up in some kind of situation that hurt your credit before. And now they want this "one more thing."

I think that this is a good opportunity for you to change this dynamic with them. They need you to make their scheme work. They probably figure that because they "took this loan for you" you are, or at least feel, obligated to go along. If you had an adversarial relationship with your parents, it would be easy to advise you to tell them to leave you out of it. But it sounds like you love them and want them to be comfortable in their old age.

It will likely cause friction for you to request more disclosure before going along, but again, assuming you are in a loving and reasonably healthy family, if you frame your questions in a "help me help you" light (i.e. "I want to do this, but I want to make sure I won't be affecting my credit or other financial situation because xyz"), there's a good chance you'll get them to be more open.

It's also important to remember that their reluctance to give information may be rooted in: "my parents have a history of poorly managing their money and subscribe to the 'do what's easiest without thinking it through' financial model" Getting the information you'll need to ask for will be work for them, and if they are used to being lazy about money, they might be disgruntled about having to do work.
posted by sparklemotion at 12:00 PM on August 29, 2016 [1 favorite]

I wouldn't trust them. Their word would hold no meaning for me. I'm not at all knowledgeable in estate tax matters, or large sum of money financial planning, or anything that is applicable here, but based on your description, neither are they. I wouldn't want to touch this with a ten-meter cattle prod unless I had an attorney or certified financial planner or somebody with some credentials who was working exclusively for me tell me, "Yes, this is a legal and logically sound plan." So if my family really wants to do this, they can write a check to the tax attorney of my choosing to cover the cost of this legal consultation.

If my choice is family friction or sketchy business deal bordering on fraud, I'll take friction. And keep in mind that their request for this unsavory action is the actual source of the friction, not your refusal to play along. They're the ones who are violating the social code in the first place, not you.
posted by disconnect at 12:39 PM on August 29, 2016

Response by poster: sparklemotion - you are heartwarmingly insightful. Thank you. They are both amazingly generous and loving people, but a bit shortsighted, disorganized and defensive, making it hard to get information from them (especially accurate information).

It's actually been the opposite though. Because of some previous, shall we say, 'f---ing with my credit', I think they've felt obligated to not ask me for finance related favors.

We're going to have along conversation tonight.
posted by AutoPilot83 at 1:12 PM on August 29, 2016 [1 favorite]

Response by poster: Corb - I trust my brother and we have a good relationship. Also he is usually very outspoken about ensuring my parents have a decent financial future; he's the most well-off among the three siblings and feels like it'll fall to him to take care of them later in life. He's not trying to gain anything from this situation, but might want some say in how the money is spent (which is A) a good idea for my parents sake and B) a good position for my very responsible brother to be in.
posted by AutoPilot83 at 1:16 PM on August 29, 2016

I don't have a ton of advice - beyond that you should definitely talk to a lawyer.

But can't you find out how much ParentPlus loans were taken out from your school? I always got tuition statements showing the breakdown of how much each loan paid off for each semester. Can you call your school's financial aid office and ask for the total of loans? That would at least give you the starting balance which would be the maximum owed unless they were on hold and accumulated interest.
posted by Crystalinne at 2:49 PM on August 29, 2016

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