South Carolina Estate Tax: Mistakes to Avoid [+ IRS Strategies]

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Paul Sundin, CPA

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South Carolina has seen a recent influx of new residents. As a result of the pandemic, many people have moved to the state away from large cities in the Northeast.

When people relocate to the state, they often wonder if there is an estate tax, gift tax, or inheritance tax. In this post, we will address these three issues. 

South Carolina Estate Tax

I’m happy to inform you that South Carolina does not have an estate tax. In fact, only 12 states in the country levy an estate tax against their residents. Fortunately, South Carolina is not one of them.

But don’t forget about the federal estate tax. South Carolina residents are still subject to it.

Tell me about the federal estate tax

Often called the death tax, the federal estate tax has been around for a long time. The good news is that very few people are subject to it. Only about 1/2 of 1% of all taxpayers will need to be worried about it.

Understanding how the federal estate tax works is, for the most part, straightforward. When a person dies it creates an estate. The executor of the estate needs to analyze the financial assets of the person who passed away in addition to determining any liabilities they had at date of death.

The assets need to be properly valued. Assets would include bank accounts, but also stocks, bonds, and mutual funds.

Don’t forget that real estate and businesses need to be included in assets as well. The valuation of these items can be subjective and this is what adds to the complexity of the estate tax.

When taking a look at liabilities, don’t forget credit card debts, utility bills, and medical bills. In most situations, these won’t be that much, but you never know. Mortgages relating to any assets included in the estate should also be deducted from the estate.

Lastly, the executor should deduct certain administrative costs. These would include tax fees, attorney fees, and any professional services provided, like appraisals.

The net calculation is then compared to the estate exemption amount. Any excess over the exemption amount is applied at a rate of 40%.

In the United States, the estate tax is a major source of revenue for state and local governments. In 1999, the revenue from the estate tax represented 0.2 percent of total state revenues.

New York was the only state to collect more than $1 billion in estate taxes, which is less than one percent of its total general-revenue-generating capacity. In addition, 11 other states collected more than $100 million in estate taxes. In general, the higher the exemption amount, the greater the revenue from the inheritance tax.

There are several ways to avoid paying estate taxes upon the death of a spouse or child. A revocable living trust is a type of trust that gives the settlor the ability to make changes during his or her lifetime.

Usually, the trust’s terms direct the trustee to pay the settlor for life, but when the settlor dies, the assets in the trust are distributed according to the grantor’s wishes. Although a revocable living-trust does not provide a tax shelter, it is still considered a legal way to prevent estate taxes.

A married couple is exempt from paying estate taxes if they do not have children. If they are married, the spouse may be able to leave everything to each other without paying any estate tax. In addition, gifts to spouses who are not U.S. citizens are capped at $164,000 per year through 2022.

Nevertheless, the limits may increase periodically. These gifts to beneficiaries are not subject to income tax, but can be subject to capital gains tax.

South Carolina inheritance tax and gift tax

I’ve got more good news for you. South Carolina does not assess an inheritance tax, nor does it impose a gift tax.

But if you live in South Carolina and you receive an inheritance from another estate, you could be subject to inheritance tax in that state. There are seven states that assess an inheritance tax, so make sure to ask your accountant if you think you may be subject to it.

How to Legally Avoid the South Carolina Estate Tax

Since South Carolina does not impose estate tax on their residents, you have little to worry about. However, the federal estate tax could still be an issue. There are multiple planning techniques involving trusts that can reduce estate tax liabilities. Make sure to consider the following:

  • Irrevocable Life Insurance Trust
  • Qualified Personal Residence Trusts 
  • Grantor Retained Annuity Trusts  
  • Crummey Trusts 
  • Special Valuation of Farms and Businesses
  • Grantor Retained Income Trusts
  • Intentionally Defective Grantor Trust
  • Donor-Advised Funds
  • Minor Trusts 
  • Family Limited Partnerships
  • Charitable Remainder Trusts
  • 529 Plans
  • Direct Medical and Tuition Payments 
  • Gifts Below Annual Exemption
  • Qualified Terminable Interest Property
  • Dynasty Trusts
  • Charitable Gift Annuity
  • Grantor Retained Unitrusts

Who might consider estate planning?

Estate planning is for everybody. But people who have the following situations should take a close look at some of the above noted planning strategies:

  • Medical professionals
  • CPAs, accountants, engineers, IT professionals
  • Retirement accounts over $1 million
  • People with life insurance policies of at least $1 million
  • People who stand to receive a large inheritance
  • Business owners and entrepreneurs
  • People with multiple rental properties
  • Partners in passive activities
  • Consultants with significant earning potential

Overall South Carolina tax structure

Take a look at the summary below:

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

South Carolina is a relatively friendly tax efficient state. It does have property taxes and a state income tax of course. But the fact that it has no inheritance, gift, or estate tax it’s a nice result.

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