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North Carolinians are used to paying income taxes each year. However, at death, they can be subject to a different form of taxation – estate taxation.
Estate taxation is different from income taxation because it is not a tax on your income. Instead, it is a tax on your “net worth” at the time of your death.
Estate Taxation Vs. Income Taxation
The distinction between estate taxation and income taxation can be seen in comparing a worker who is age 35 with a retiree who is age 75.
The 35-year-old worker who earns a high salary and a bonus may have a greater annual income than the 75-year-old retiree who lives on Social Security and some retirement income.
On the other hand, because the 35-year-old worker is younger and has had less time to accumulate property, the 35-year-old worker may have a lower “net worth” than the 75-year-old retiree who owns significant assets.
In this comparison, the 35-year-old worker is subject to a greater potential for income taxation, while the 75-year-old retiree is subject to a greater potential for estate taxation.
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Estate Taxes in North Carolina | Estate Taxes Vs. Property Taxes
In terms of other taxes, estate taxes probably can best be somewhat compared to property taxes – a tax on the value of the assets that you own, rather than on the income derived from the assets that you own.
Estate taxes are different from property taxes because estate taxes also take into account liabilities and are only imposed at death.
Taxable Estate
Persons in North Carolina are subject to estate taxes assessed by the Federal government. The tax base for Federal estate taxation is known as the “taxable estate” (the legal equivalent for Federal estate tax purposes of your “net worth”).
The taxable estate is equal to the “gross estate”, less certain “allowable deductions”.
Gross Estate And Taxable Estate
The gross estate generally is based on the value of the decedent’s assets at the date of death. The gross estate can include:
Real estate;
Stock and bonds;
Mortgages and promissory notes payable to the decedent;
Cash (in possession or in banks);
Death benefit proceeds from life insurance on the decedent’s life;
The decedent’s applicable interest in a jointly-owned property;
Interests in business;
Claims, rights, and judgments owned by the decedent;
Digital assets;
Household goods and personal effects and other personal property (including automobiles);
Assets transferred by the decedent to a revocable Living Trust;
Assets subject to certain powers of appointment;
Annuities; and
IRAs and pension plans.
After the gross estate is aggregated, the following items can be allowable deductions from the gross estate to determine the taxable estate:
Funeral expenses;
Expenses incurred in administering property (including attorney fees);
Liabilities of the decedent (including mortgages and liens);
Net losses during the administration of the decedent’s estate;
Transfers of assets to a surviving spouse (the “marital deduction”). The marital deduction may be the most important deduction to reduce Federal estate tax liability, as assets that transfer to a surviving spouse (probably the most common form of testamentary disposition on the death of the first-to-die spouse) are not subject to Federal estate tax liability. The marital deduction is unlimited, meaning that it can apply to any amount of transferred assets; and
Transfers of assets to a charity.
Once the taxable estate is determined, it generally is subject to a Federal estate tax rate to compute a Federal estate tax liability. Federal estate tax rates are graduated, ranging from 18% to 40%.
Federal estate tax liability is then subject to certain estate tax credits.
Estate Tax Exemption
The most important of these estate tax credits is known as the “unified credit” or the “estate tax exemption amount”.
The estate tax exemption amount is intended to exclude certain estates from Federal estate tax liability; when the taxable estate is below a certain threshold amount, it is considered too small to be subject to Federal estate tax liability.
The estate tax exemption amount is indexed for inflation.
For decedents dying in 2023, the estate tax exemption amount is $12,920,000.
This amount means that any decedent dying in 2023 whose taxable estate is $12,920,000 or less will not be subject to Federal estate tax liability.
It also can be viewed that in 2023, a married couple can have joint taxable estates of $25,840,000 ($12,920,000 x 2) or less and not be subject to Federal estate tax liability.
If a decedent does not need to utilize all of the decedent’s estate tax exemption amount, it is possible that the decedent’s surviving spouse can utilize the unused decedent’s estate tax exemption amount (known as the “deceased spousal unused exclusion” amount) under the concept of “portability”.
Based on the combined effect of the unlimited marital deduction and the large estate tax exemption amount, most North Carolinians will not have to pay Federal estate tax liability on death.
However, if the decedent’s gross estate is more than $12,920,000 in 2023, a Federal estate tax return must be filed.
Federal Estate Tax liability
In addition, if a surviving spouse intends to utilize the deceased spousal unused exclusion amount of a deceased spouse, a Federal estate tax return for the deceased spouse generally must have been filed.
A Federal estate tax return is filed on Form 706, “United States Estate (and Generation-Skipping Transfer) Tax Return. Form 706 generally must be filed within nine months after the date of the decedent’s death.
If you are potentially subject to Federal estate tax liability, there are certain steps that can be taken during your lifetime to minimize any Federal estate tax liability.
Three steps to minimize your Federal estate tax liability are:
Gifting. By gifting assets to younger family members, you can both reduce the amount of your gross estate and potentially defer any payment of Federal estate tax liabilities until their deaths (if expected to be later than your death).
Irrevocable life insurance trust. An irrevocable life insurance trust can exclude death benefit life insurance proceeds from your gross estate.
Charitable donations. Donations of property to charities on your death can reduce your taxable estate.
Estate Taxes in North Carolina Conclusion
The above discussion focuses on Federal estate taxes. Some states also assess State estate taxes. However, North Carolina repealed its state estate tax in 2013. Thus, North Carolina resident decedents only need to be concerned with Federal estate taxes, and not state estate taxes.
The proper handling of estate taxes (and other taxes) is one aspect of the probate process in North Carolina after a decedent’s death. If you need help guiding through estate tax issues or any other issue in the probate process it is highly advised that you reach out to a professional tax advisor
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* NOTE: North Carolina Probate Solutions and the author of this article is not a licensed attorney or CPA. This post should not be considered legal or tax advice. Always consult an estate attorney or tax professional when needing legal answers and legal advice.