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.
Table of contents
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.
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.
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
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.