Creating a successful estate plan that accomplishes all of your various goals requires you to consider a number of complex, yet inter-related, factors. One of those factors is the impact taxes will have on your estate. In fact, failing to understand, and account for, the impact of taxes on your estate can cause an otherwise well thought out estate plan to fail miserably. You should already be aware of the need to consider the impact federal gift and estate taxes might have on your estate plan; however, do you need to worry about the impact that a North Carolina estate tax will have on your plans?
Why Is It So Important to Understand and Consider Taxes?
When you die, your estate will be required to go through the legal process known as probate. Probate serves several important purposes, including the collection of any tax debt owed by the decedent and/or estate of the decedent. Most tax debts are considered high priority debts, meaning they will be paid first out of available estate assets. All approved debts of the estate must be paid before the remaining assets can be transferred to the intended beneficiaries and/or heirs of the estate. Consequently, if you fail to consider the impact taxes will have on your estate, your tax debt could significantly diminish, if not completely eliminate, the estate that is left over and available to pass down to loved ones.
Federal Gift and Estate Taxes
All estates are potentially subject to the impact of federal gift and estate taxes. The federal tax is levied, at the rate of 40 percent, on the combined value of all lifetime gifts made by the decedent coupled with the value of all assets owned by the decedent at the time of death. Fortunately, all taxpayers are also entitled to make use of the lifetime exclusion to federal gift and estate taxes. The lifetime exclusion was permanently set at $5 million back in 2012 as part of the American Taxpayer Relief Act (ATRA), but is adjusted annually for inflation. For 2017, the exclusion amount is $5.49 million, meaning that the first $5.49 million of gifts and assets is not subject to taxation from Uncle Sam.
North Carolina Estate Tax
Although every estate is potentially subject to federal gift and estate taxes, not all estates are subject to the state level equivalent because not all states impose an estate tax. As of 2016, there were 15 states plus the District of Columbia that did impose a state level estate tax; however, the State of North Carolina is not one of those states. Like many other states, North Carolina previously levied an estate tax on estates probated in the state; however, when ATRA was passed back in 2012 North Carolina repealed its state estate tax. Therefore, you do not need to worry about state estate taxes for an estate probated after January 1, 2013 in North Carolina.
Do I Need to Worry about Any Other Taxes?
There is one other type of tax that can have an indirect impact on your estate plan – inheritance taxes. Whereas both the federal and state level gift and estate taxes are paid out of your estate assets prior to any assets being transferred to beneficiaries or heirs, inheritance taxes are paid by the beneficiary or heir after the assets are transferred out of your estate. Fortunately, only a handful of states currently impose inheritance taxes and the State of North Carolina is not one of them; however, if you have a beneficiary that lives in a state that does impose inheritance taxes, any gift you make to the beneficiary could be diminished in value as a result of the tax. It is always wise, therefore, to consult with your estate planning attorney with regard to gifts made to out of state beneficiaries to determine if the gift will be subject to inheritance taxes.
If you have additional questions about the North Carolina estate tax, contact an experienced North Carolina estate planning attorney at The Law Offices of Cheryl David by calling 336-547-9999 to schedule an appointment.