Dear Liz: Before we were married, my spouse co-signed for two student loans for a relative. The loans have not been paid off. Occasionally the former student is late and my spouse is contacted. If I survive my spouse, who has end stage kidney disease, will I be responsible for the debts if the relative defaults?
Answer: Because your spouse co-signed the loans before marriage, the debt isn’t considered community debt. In other words, you can’t be held directly responsible if the relative defaults.
Unpaid student loan debt could become a claim against your husband’s estate, however. Some lenders might push to get reimbursement this way, while others won’t. Creditors typically have a limited period in which to make such claims (the period varies by state).
To complicate matters further: some older student loans have automatic default clauses that make the entire balance due if a co-signer dies. That means the lender could demand immediate repayment from the relative and from your spouse’s estate. It would be smart to check the promissory note to see if it contains such language. If it does, the relative can ask the lender or lenders about a “cosigner release,” which would remove your spouse’s name from the debt. Another and even better option would be for the relative to refinance the loans in their own name if possible.
An estate planning attorney can help answer your questions about the potential impact of these loans as well as other steps you can take now to protect your spouse’s estate.
Dear Liz: I will be applying for Medicare next year. Last year I received an inheritance, and also sold a second home which increased our taxable income for the year. I once read that there is a form that needs to be completed to let Medicare know that this is only a one-time occurrence. However, my tax advisor said that there is no need to let Medicare know and he had not heard of any such form. I feel he does not understand that the higher income might affect our Medicare premiums. My understanding is that if I don’t submit the form, my Medicare payment will be a lot higher than expected. Can you suggest what I should do?
Answer: There is such a form, but it’s unlikely to help in your situation.
Medicare premiums are based on your income from two years earlier, as shown on your tax returns. People with higher incomes face “income related monthly adjustment amounts” (IRMAA) that can substantially increase their Medicare Part B and Part D premiums. (Part B covers doctor’s visits and Part D covers prescriptions.)
Form SSA-44 is designed to help people whose income has taken a hit because of major life changes, such as retirement, divorce or the death of a spouse. It’s not designed to spare people who had taxable windfalls, such as capital gains from a property sale.
Inheritances generally aren’t taxable events, however, with a few exceptions. If you inherit someone’s IRA, for example, you generally must start withdrawals which are typically taxable. Otherwise, inherited money and assets typically don’t show up on your tax returns or affect your Medicare premiums.
Dear Liz: Regarding the inherited gold coins question, why would anybody tell the IRS they inherited coins and subject themselves to a 28% capital gains tax? That seems very illogical.
Answer: To clarify, the original reader was asking about selling gold coins which had risen dramatically in value since she inherited them. Coins are considered collectibles so the difference between the inherited value and the sale price would be subject to a 28% federal capital gains tax.
How would the IRS know if you’ve sold gold coins for a profit? A dealer who buys the coins might be required to file a form with the IRS that’s designed to thwart money laundering. Also, payments are typically made through bank transfers or checks, unless you’re planning to walk out with a bag of cash like a cartoon bank robber. Bank transactions could be examined if you’re ever audited.
Even if you calculate the odds of getting caught as low, the question remains: Do you only do the right and lawful thing when you have to?
Most people who aren’t sociopaths have a sense of integrity. Doing something they know to be wrong damages that integrity, even if no one else ever knows. You may be able to save a bit of money by cheating on your taxes, but you can’t put a price on a clear conscience.
Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
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