If you recently lost a family member or close loved one you are undoubtedly dealing with a number of strong emotions, including grief. Thinking about the legal and practical ramifications of your loved one’s death may be difficult under the circumstances; however, if you are a beneficiary or heir of the estate you will need to set aside your emotions long enough to focus on how your inheritance will impact your life. For example, will you be required to pay a North Carolina inheritance tax as a result of your inheritance?
Are You a Beneficiary or Heir of the Estate – What Is the Difference?
People often use the words “beneficiary” and “heir” interchangeably when, in fact, they do not have the same meaning. A beneficiary is someone who was specifically named as the recipient of a gift under the terms of the decedent’s Last Will and Testament. For example, if your Aunt Ruth recently died and there was a provision in her Will that left “my vacation house in Myrtle Beach to my niece Betsy Smith,” and you are her niece Betsy Smith, then you are a beneficiary of the Will. An heir is someone who has a legal right to inherit under the state (in this case North Carolina) intestate succession laws. When a decedent did not leave behind valid Last Will and Testament they are said to have died “intestate.” When a person dies intestate, the state effectively decides who inherits the decedent’s property through the use of the state’s intestate succession laws. Generally, only a spouse and very close family members inherit when someone dies intestate. If your mother dies, for example, and failed to execute a Will prior to her death, you would likely be entitled to a percentage of the total value of her estate as an heir to the estate. Heirs, however, do not receive specific gifts.
The Tax Implications of an Inheritance — Gift and Estate Taxes
In the United States, Uncle Sam taxes the transfer of wealth. One of the ways the transfer of wealth is taxes is through the imposition of a federal gift and estate tax. Federal gift and estate taxes are imposed on the value of all gifts made during a decedent’s lifetime coupled with the value of all assets the decedent owned at the time of his/her death. For example, if Aunt Ruth made gifts during her lifetime valued at $2 million and owned assets valued at $5 million at the time of her death, her estate would potentially owe federal gift and estate taxes on the combined value of $7 million. All taxpayers are entitled to make use of the lifetime exemption, however, which is set at $5 million and adjusted annually for inflation. For the year 2016, the lifetime exemption amount is $5.45 million. After Aunt Ruth’s estate deducts the exemption, she would only owe gift and estate taxes on the remaining $1.55 million, taxed at the rate of 40 percent. Any federal or state gift and estate tax due, however, is paid by the estate during the probate of the estate. Therefore, a beneficiary or heir need not worry about gift and estate taxes.
What about Paying a North Carolina Inheritance Tax on My Inheritance?
Another way in which the transfer of wealth can be taxed is through the collection of an “inheritance tax.” Unlike gift and estate taxes, which are paid by the estate before the transfer of an asset, an inheritance tax is paid by the recipient of the gift after the transfer. As you can imagine, an inheritance tax can have a significant impact on the value of your inheritance if it applies. Fortunately, only six states currently impose an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania). As you can see, North Carolina is not on the list of states that collect an inheritance tax, meaning you do not need to worry about your inheritance being taxed by the state.
If you have additional questions about the North Carolina inheritance tax, contact an experienced Greensboro probate attorney at The Law Offices of Cheryl David by calling 336-547-9999 to schedule an appointment.