What Happens to Your Student Loans When You Die?

One question that often arises during discussions about financial planning and estate management is what happens to student loans when a borrower passes away. Understanding the implications for both federal and private student loans can help individuals, and their families better prepare for unexpected circumstances.

Federal Student Loans

Federal student loans are generally discharged upon the borrower’s death. This means that the remaining balance on the loan is canceled, and the borrower's family is not responsible for repayment. To initiate this process, a family member must provide the loan servicer with proof of death, such as an original or certified copy of the death certificate. Parent PLUS loans, which are federal loans taken out by parents on behalf of their children, are also discharged if either the student or the parent borrower dies.

Private Student Loans

The situation is more complex with private student loans, as each lender has its own policies. While many private lenders offer a discharge upon the borrower's death, this is not guaranteed and can vary based on the loan agreement. If a private student loan does not automatically discharge, the debt may become part of the deceased’s estate and could be paid from the estate's assets during probate. Additionally, if there is a cosigner on a private student loan, that person may be held responsible for the remaining balance unless the lender has a policy to release the cosigner upon the borrower's death.

Responsibility for Other Debts

When a loved one passes away, their estate typically goes through a process called probate, where outstanding debts are paid off from the estate's assets before any remaining assets are distributed to beneficiaries. It's important to note that most debts, including some private student loans, may need to be paid out of the deceased’s estate, but family members are generally not personally liable unless they are a cosigner, or the loan is held in a community property state.

Protecting Your Loved Ones

To protect loved ones from being burdened by student loans or other debts after one's death, consider the following options:

1. Life Insurance: A life insurance policy can provide a payout that helps cover any outstanding debts, including private student loans, ensuring that family members are not left with financial obligations.

2. Estate Planning: Creating a comprehensive estate plan, which may include a trust, can help manage how assets and debts are handled upon death, potentially keeping certain assets out of the probate process.

3. Review Loan Terms: Understanding the terms of any private loans and consulting with the lender can clarify what happens to the debt if the borrower passes away.

By proactively addressing these issues, individuals can help alleviate some of the financial burdens that might otherwise fall on their loved ones.

Article Sources:

1. Dori Zinn, What happens to student loans when you die? Investopedia (2024), https://www.investopedia.com/student-loans-when-you-die-8640572 (last visited Aug 30, 2024).

2. Ben Luthi, What happens to student loans when you die? Experian (2022), https://www.experian.com/blogs/ask-experian/what-happens-to-student-loans-when-you-die/ (last visited Sep 3, 2024).

3. Ben Luthi, What happens to student loans when you die? LendingTree (2022), https://www.lendingtree.com/student/what-happens-to-student-loans-when-you-die/ (last visited Sep 3, 2024).

Understanding Inheritance Tax Allocation in Trusts: Insights from the Nebraska Supreme Court

In the case of "In re Michael Hessler Living Trust," the Nebraska Supreme Court interpreted directives concerning inheritance tax allocation as specified in a living trust formed by the decedent, Michael Hessler. The appellants, Hessler's children, contested the trustee's decisions regarding the distribution of the trust's assets and the payment of inheritance taxes, especially about a significant property granted to the decedent's girlfriend, Lori J. Miller.

Michael Hessler established a living trust in 2006, with subsequent amendments, notably one that explicitly bequeathed his residence to his girlfriend, Lori J. Miller, provided she lived there at the time of his death. Following Hessler's death in November 2020, disagreements emerged over who should bear the burden of inheritance taxes. Specifically, the dispute centered on whether these taxes should be equally apportioned among all beneficiaries or paid from the trust's residue as directed by the trust's provisions.

Hessler's children filed a petition against the trustee and Miller, asserting that inheritance taxes and administrative expenses related to the residence should be charged against Miller's share. The trustee moved the case to Scotts Bluff County, asserting that the trust was registered there, a move that the children later contested. Ultimately, the Court upheld the venue transfer.

The Nebraska Supreme Court addressed several critical issues in this case:

1. Venue Transfer: The Court upheld the venue transfer, stating it was within the trial court's discretion and justified by the trust's registration in Scotts Bluff County.

2. Inheritance Tax Apportionment: A central issue was the interpretation of the trust's language regarding the payment of inheritance taxes. The trust explicitly stated that all inheritance and estate taxes should be paid "from this trust," which the Court interpreted as a clear and unambiguous directive that superseded the default statutory provisions requiring equal apportionment among beneficiaries.

3. Jurisdiction and Admissibility of Evidence: The Court determined it had jurisdiction over the appeal and held that the lower Court did not significantly err in admitting extrinsic evidence to determine the settlor's intent. The Court stated that any such mistake was harmless as the decision rested primarily on the clear language of the trust and its amendments.

The Supreme Court affirmed the lower Court's decision, validating the trustee's actions in administering the trust according to the settlor's explicit instructions. The ruling clarified how trust documents concerning tax liabilities should be interpreted and reinforced the legal principle that clear and unambiguous language in a trust document or will must be adhered to. This decision provides crucial guidance on the administration of estates and the responsibilities of trustees.

This case underscores the importance of precise language in estate planning documents, especially concerning tax obligations. It illustrates the complexities of trust administration, particularly when substantial assets and tax implications are involved. Additionally, it highlights the judiciary's role in resolving disputes based on the interpretation of legal documents following the settlor's intent.

This decision serves as a critical reference for legal professionals involved in estate planning and trust administration. It emphasizes the need for clarity and specificity in drafting trust documents to ensure the settlor's wishes are accurately executed and legal conflicts are minimized. The ruling in this case is a vital reminder of the importance of meticulous estate planning and the impact of precise language in legal documents. Erickson Sederstrom Law Firm is here to help you you with all of your Estate Planning needs.

Safeguarding Your Estate: Addressing Undue Influence

In a recent estate case, the Nebraska Supreme Court applied a hearsay exception to allow the decedent's prior will as evidence of her testamentary capacity to execute the will contested by one of her sons. 

In the Estate of Walker, the decedent, Rita Walker, died at the age of 84 and left her estate to Mark Walker, her son, naming him sole beneficiary and personal representative. Rita's will excluded her three other sons. Michael Walker, one of these sons, sued to contest the will on the grounds that Rita lacked testamentary capacity to execute the will, which was executed on September 15, 2021, eleven days before her death. Michael alleged Rita was unduly influenced to execute the will. Undue influence can invalidate a will or contract when one party is unable to exercise his or her independent volition freely.

The county court determined the will was the product of undue influence and ordered that Rita's property proceed intestate, appointing Michael as personal representative. However, on appeal, the Nebraska Supreme Court held that the lower court erred in excluding evidence of Rita's prior will, signed in February of 2016. While this document was hearsay because it was not a statement of Mark himself, it fell within a hearsay exception and was relevant. The prior will served to demonstrate Rita's "constant and abiding scheme" for her property and was relevant to Rita's testamentary capacity at the time of the subsequent will's execution.

Therefore, the Nebraska Supreme Court reversed the lower court's rejection of Rita's will and remanded the case to the lower court to re-examine the issues of testamentary capacity and undue influence in consideration of Rita's prior will.

This ruling serves as a reminder to prioritize comprehensive estate planning methods to mitigate the risk of courts rejecting valid estate planning documents. Recognizing and addressing the risk that your will may be vulnerable to allegations of undue influence is crucial to ensuring your final wishes are honored.

Estate Planning and Bitcoin: What you need to know

If you follow financial news, have seen a commercial where everyone from Tom Brady to Kim Kardashian has been marketing cryptocurrency, or have heard tales from a friend or neighbor who hit it big with Bitcoin----you know cryptocurrency has become mainstream in 2023. With stories like the collapse of FTX and the volatility of Bitcoin prices garnering significant media coverage over the prior year, Bitcoin and cryptocurrency have also caught the attention of estate planners.

While planning for the transfer of a family farm or Berkshire Hathaway stock has been discussed for generations in estate planning meetings in Nebraska, Bitcoin’s relative newness and digital nature have created challenges for estate planning purposes. As a virtual asset, Bitcoin is often stored in an app on a smartphone ---heavily protected by passwords and keys---which makes it more likely that your heirs may overlook any Bitcoin or crypto account you own. 

Further complicating matters, Bitcoin Wallets do not allow the transfer of the wallet into the name of a Trust. In addition, many well-known crypto exchanges do not currently offer any beneficiary designations--- like POD (payable on death) or TOD (transferable on death). Thus, there are some important considerations when planning for the transfer of your cryptocurrency:

• Ensure that your estate plan specifically references your Bitcoin or cryptocurrency and provides for a secure transfer method to your heirs. The solution may be crafting a detailed letter of instruction to your successor trustee or personal representative with details on how to access and transfer your cryptocurrency.

• Name a beneficiary for your crypto assets in your estate plan. A beneficiary is the person or organization you want to inherit an asset. Make sure to list all your crypto assets in your estate plan, where the assets are stored, and which beneficiaries should receive them.

• You could also name a separate digital trustee in your estate plan---- and entrust this digital representative with protecting and transferring your cryptocurrency. A person with some experience, expertise, and knowledge in handling digital assets could make the administration of your estate much more efficient. 

As large-scale institutions and exchanges begin to enter cryptocurrency and new laws and regulations come into effect, it would be wise to revisit your estate plan to ensure that your nominated trustee can access and effectively transfer your cryptocurrency without unnecessary cost and delay.

If you have questions or are interested in reviewing your current estate plan, please get in touch with any of our experienced estate planning attorneys at Erickson & Sederstrom.

Estate Planning is for Everyone

Who needs an estate plan? All people, including young adults, seniors, single people, and people with families, can benefit from an estate plan. While these groups may benefit differently from certain aspects of an estate plan, it is important that all people have a clear plan for their estate.

Estate plans typically include a testamentary instrument, such as a last will and testament, or a trust, and health and financial powers of attorney. What comprises a person’s estate plan can vary based on their specific needs and circumstances. Any estate plan should answer the following questions:

Who cares for you?

• Designating someone to serve as your financial and health power of attorney, and guardian and conservator, if necessary, ensures that someone of your own choosing makes decisions for you if you become incapacitated.  

Who cares for your children?

• Nominating a guardian, which is the protector of the person, and a conservator, which is the protector of financial resources, for your minor children or children with special needs assures that the courts know exactly who you choose to take care of your loved ones.

Who manages your estate once you have passed away?

• Nominating a personal representative or trustee to manage your affairs makes sure that someone you trust will manage your estate and follow your estate plan in accordance with your wishes.

Who receives your assets and how are those assets are received?

• Selecting the people or charities who will receive the gifts from your estate and determining whether those gifts are distributed right away or held for future distribution ensures specific life circumstances of each beneficiary of your estate are fully considered.

Most of these issues impact people regardless of age or wealth. Everyone must determine who will care for them and who will benefit from their assets once they have passed away. The goals of an estate plan are to reduce uncertainty, mitigate risks, and ensure the efficient transfer of assets to beneficiaries. Having a meaningful estate plan allows you to confidently answer the above questions and alleviate potential risks and uncertainties for your loved ones after your passing.

Mark Matulka assists people with estate planning and estate administration. Mark can be reached at (402) 397-2200 or matulka@eslaw.com.

Joseph C. Byam and Joseph C. Byam II Join Erickson | Sederstrom Team

Erickson | Sederstrom is pleased to announce that attorneys Joseph C. Byam and Joseph C. Byam II, from the law firm of Byam & Hoarty, have joined the firm.

“Erickson | Sederstrom is a long-standing Nebraska firm that has attorneys who specialize in numerous practice areas. The merger will allow us to provide our clients with the depth of these practice areas, and the experience and expertise of the attorneys who practice in these areas. We think it is a great fit and are excited to get started,” says Joseph C. Byam II.

Joseph C. Byam will serve as Of Counsel to the firm, and continue to assist clients in estate planning, probate, and general business and corporate matters. 

Joseph C. Byam II will join the firm as an Associate working in the areas of estate planning. His practice includes preparing estate plans, trust administration, probate of estates, and issues related to both federal and state inheritance tax. He also advises clients in corporate or company formations.

Erickson | Sederstrom welcomes the addition of attorneys Joseph C. Byam and Joseph C. Byam II to their team.

Understanding Nebraska’s Medicaid Estate Recovery

An important part of estate planning is preparing for the recovery of any Medicaid assistance, especially if you or your spouse are over age 55 and have received any Medicaid benefits.   

Medicaid is a federal and state partnership that helps people with limited resources and income pay for health and long-term care costs. People over age 55 usually receive Medicaid funding for nursing facility services, home and community-based services, and related hospital and prescription drug services. 

There is a common misconception that once a person has exhausted their personal financial resources in paying for the cost of their health and long-term care, then Medicaid funding will continue paying for care at no cost to the person. While it is true that Medicaid will begin covering certain health expenses once a person meets asset and resource requirements, Medicaid funding is more of a loan, not a cost-free grant of funding. 

Because certain assets, such as a house, are disregarded when determining whether a person qualifies for Medicaid, federal and Nebraska law requires the Nebraska Department of Health and Human Services (DHHS) to recover any Medicaid expenses. The debt of Medicaid expenses arises during the recipient's lifetime; however, DHHS only seeks recovery after the recipient's death or the death of the recipient’s spouse. The outstanding debt is recovered from the former Medicaid recipient’s estate through a process known as Medicaid Estate Recovery. 

If a Medicaid recipient was 55 years of age or older, then their assets after death are subject to Medicaid Estate Recovery. Like with most rules, there are exceptions. First, DHHS cannot recover costs of Medicaid assistance provided to a recipient under the age of 55 unless the recipient permanently resided in a medical institution. Second, DHHS cannot recover costs if the deceased recipient is survived by a spouse, a child under 21, or a dependent regardless of age who is blind or permanently disabled. 

After a Medicaid recipient passes away, DHHS works with families, attorneys, and courts to recover funds for the Nebraska Medicaid Program.  In Nebraska, DHHS acts as a creditor with a claim against the assets or estate of a decedent; however, DHHS usually does not place liens on specific property for purposes of Medicaid Estate Recovery.  While a former Medicaid recipient’s assets and estate are subject to recovery, the recipient’s heirs may seek an exemption or reduction if recovery would create a hardship.  

Planning for Medicaid Estate Recovery is critical if you or your spouse are over the age of 55 and have received any Medicaid benefits.  If you have any questions about Medicaid Estate Recovery and how it may impact your estate plan, please reach out to any of the highly knowledgeable and experienced estate planning attorneys at Erickson | Sederstrom at (402) 397-2200.