North Carolina Estate Tax: Our Top Strategies [+IRS Pitfalls]

Don't get tripped up by the estate tax rates, limits and exemptions.

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Paul Sundin, CPA

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North Carolina has experienced tremendous growth in recent years. With that growth comes tax questions. Specifically, does North Carolina have an estate tax?

In this post, we will tackle this question and also discuss inheritance tax and gift tax. So let’s get started.

North Carolina estate tax

Estate tax is often called the death tax. It is assessed against estates that exceed a given exemption amount.

But I’m happy to say that North Carolina does not have an estate tax. So that’s one thing less for residents to consider.

But don’t forget the federal estate tax still exists.

Federal estate tax planning

So let’s take a closer look at how the federal estate tax works. In theory, it is rather straightforward. But we know that in practice it’s very complex. It just depends on the size of the estate and the type of assets.

The executor of the estate is tasked with hiring the appropriate professionals to determine the estate tax liability. The starting point is to determine the assets of the estate. They should all be itemized.

Assets would include real estate, business holdings, investments, and personal items. Appraisals and other valuations should be completed on these assets. These appraisals can be very easy for certain asset classes, but for business assets they can be a bit more complex.

Once valuations are completed, the executor then deducts estate liabilities from the assets. This is usually mortgages, but can include credit cards and other estate debts.

The last thing to be done is to deduct administrative and funeral costs from the estate assets. His final determination is called net estate assets and becomes the base on which estate taxes apply.

But before calculating the liability, the estate gets to subtract the estate exemption. It is only on this net amount that the estate tax is applied.

Fortunately, the estate tax is only applicable to less than 1% of all states. But don’t get complacent. States are getting more and more aggressive at assessing tax and you never know when North Carolina instigates one.

Trust tax law is a complex area of law, but the basics are easy to understand. The beneficiaries of a trust are the individuals who receive the funds that are managed in the trust. These individuals may receive annual income distributions, but when the time comes for the trust to terminate, they will receive the entire amount of the trust.

Therefore, it is important to understand the details of this tax law and how it affects your beneficiaries. This article will explain how a trust is created and what to expect when you open a trust.

When creating a trust, you will want to know how much the beneficiary is likely to earn and who will be receiving the money. The beneficiary may not be in the best tax bracket, but he or she may be eligible for the standard deduction or personal exemption, which is $5950 in 2012, which means that there is no taxable income for the beneficiary.

If the beneficiary has no other sources of income, the trust income will be taxable only if it exceeds the standard deduction or personal exemption, which will be at the end of the year.

In most cases, the trust will be considered terminated when all assets are distributed to beneficiaries. In some instances, the trustee may also decide to suspend the withdrawal power of a beneficiary if it is necessary to act in the best interests of the beneficiaries.

This might be a result of a lawsuit or a beneficiary’s college financial aid eligibility. When a trust is established to avoid probate, the asset is protected from creditors, which is crucial for inheritors.

Inheritance and gift tax 

I’ve got more good news for you. North Carolina has no inheritance tax or gift tax. In fact, the IRS does not have an inheritance tax, while some states do have one.

So if you live in N. Carolina but inherit assets from an estate in another estate, you could have to pay inheritance tax. Fortunately, few states impose an inheritance tax.

Understanding trust tax rules is vital to the success of your estate planning. You should seek professional help if you are unclear about your options. Below are some general guidelines to help you plan your estate for maximum tax benefits.

A trust is a legal structure that continues after its creator dies. Because of this, it has complicated tax rules. Regular distributions from trusts may be considered taxable income.

Whether they are charitable gifts or other types of income are taxable will depend on your year-end informational return. A trust’s tax rate may change as the trust ages, but a trustee’s veto power can prevent this from happening.

A trust’s income tax status depends on the terms of its creation and distribution. For example, if an irrevocable trust is created at death, the assets transferred to the trust will be taxed at the trust’s tax basis.

It’s important for your heirs to determine the tax basis of their inherited assets before they sell them. If you’ve made a gift to a trust, you should consider filing a gift tax return to avoid estate taxes.

Strategies to legally avoid (eliminate) the North Carolina estate tax

You may not have an estate tax problem at this point in your life. But circumstances can quickly change. You may not believe you have a problem, but that doesn’t mean you shouldn’t start considering planning ideas. Your accountant and attorney can help you implement the following:

  • Grantor Retained Annuity Trusts (GRATs)
  • Charitable Gift Annuity
  • Direct Tuition Payments
  • Family Limited Partnerships (FLPs)
  • Charitable Remainder Trusts (CRUT)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Revocable Grantor Trusts
  • Irrevocable Life Insurance Trust (ILIT)
  • Grantor Retained Income Trusts (GRIT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Special Valuation of Farms and Businesses
  • Gifts Below Annual Exemption
  • Qualified Terminable Interest Property (QTIP)
  • Dynasty Trusts
  • Grantor Retained Unitrusts (GRUTs)
  • Direct Medical & Healthcare Payments 

Who needs to think about estate planning?

While everybody should address some type of estate planning, it is more than critical for many people. If you are in one of the following categories, you should start planning:

  • Large stock, bond, or mutual fund holdings
  • Life insurance policies over $1 million
  • Stand to inherit large sums of money
  • Retirement plan assets over $1 million
  • Significant rental property holdings
  • Own a business or are an entrepreneur
  • Professional occupation and/or high income

North Carolina tax environment

The table below summarizes the pros and cons:

No estate taxIncome tax
No gift taxProperty tax
No inheritance taxSales tax

North Carolina does have income tax, but it doesn’t have an estate tax or gift tax. These should all be considered when you look at the overall state tax structure.

Make sure you review your estate situation with a qualified attorney and tax professional. Estate tax mediation can take various forms and should start as soon as possible. 

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