If you are looking at planning for end of life financial circumstances, you may be wondering about the tax laws in NC.
- How much will the Federal and State governments take from your final estate when you pass away?
- Will your heirs have to pay inheritance taxes on the gifts you give them before or after your death?
- How high will the tax rate be if heirs do pay?
These and other questions are crucial to understanding how to plan for distribution of assets after you pass away. Probate and Taxes can take a chunk out of your estate. Read on to learn more about how NC handles it’s taxes and the finances of an estate after death.
The Probate Process is Expensive
After you die, your gross estate will go through a process known as probate if the estate is worth more than $20,000 as an individual or $30,000 with a spouse. Probate is the process in which the court opens up your financial documents as public information in order to pay the taxes and creditors of the estate and decide who will receive the remaining assets.
If you die without a will in NC, you have died “Intestate” and your family is subject to attending court to argue their case about which of your assets should go to whom. You can learn more about intestate succession laws here. Creditors and anyone who believes they are owed money can also make a claim on the estate. You don’t want to put your family through this type of situation.
Dying with a Last Will & Testament
Having a will makes the process of Probate much easier because the court understands what your wishes are. A will allows you to decide who gets what after you die as well as how to manage the assets of your estate. You can write a will by signing it in front of 2 witnesses who then sign the will in front of you. For further proof that it is your will, you can also have it notarized. The probate court must recognize a will made in this manner as long as you are competent when it is drawn up.
In the probate process, the court appoints an administrator or personal representative (often the spouse) to handle valuing the estate, gathering information, and paying the taxes that are due and any creditors who are owed. Inheritance is then paid out from the assets in accordance with the probate court decisions.
Avoid Probate to Save Your Estate
In probate court, the estate pays lawyer and court fees. According to Investopedia, “Probate can easily cost from 3% to 7% or more of the total estate value.” If there are creditors or others who contest the will and cause disagreements, your heirs could end up paying much more to hire other attorneys to fight for their inheritance.
Probate is an expensive process that can be entirely avoided with the right planning.
Taxes in North Carolina
If you live or work in NC when you die, your estate may be subject to these taxes. If you are inheriting from someone in another state, your inheritance may also be subject to a state death tax from the originating state. Some states still charge an Estate Tax (Death Tax).
1. NC has no Estate Tax (Other States Still Have the “Death Tax”)
- Also called the Death Tax, this tax was repealed in 2013.
2. Federal Estate Tax (Death Tax) Only estates exceeding $11.4 million
- Due nine months after death
- The tax basis is the gross value of an entire estate including half of the value of property owned with someone else.
- The marital deduction allows property and assets left to the spouse to be exempt from the federal estate tax.
3. Individual Federal & State Income Tax
- Due by Tax Day the year following death
- These taxes are the normal ones we do as individuals each year. According to the IRS, “All income up to the date of death must be reported and all credits and deductions to which the decedent is entitled may be claimed.”
4. Federal Estate Income Tax
- Due by Apr 15 the year following the death
- If the deceased person has an Estate that generates more than $600 in annual gross income, then the decedent and their estate are separate taxable entities. You must order a tax ID number for the estate here, so that you can file the estate as a separate taxable entity. You will use IRS Form 1041 to file estate income tax returns.
5. Federal Trust Income Tax
- Due by Apr. 15 of the year following death
- Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, each year that the trust has $600 in income or has a non-resident alien as a beneficiary.
No Inheritance Tax in NC
There is no inheritance tax in NC. However there are sometimes taxes for other reasons. These are some of the taxes you may have to think about as an heir.
- If you live in a state that does have an estate tax, you may be expected to pay the death tax on the money you inherit from a death in NC
- IRA’s that distribute large amounts of income each year according to the new 10 year payout rule may cause you to pay taxes on the distributions
- Capital gains taxes might be accrued on some types of trusts
Gifts of less than $15,000 per year per individual are not taxed. If you are planning your estate, you can also pay for certain expenses that are not taxed such as tuition for college or medical bills for your loved ones. You can reduce the size of your estate year by year by giving non-taxable money and gifts to your loved ones.
Trusts are a legal entity with a framework that allows for financial benefits. Often, they can help an estate pay less in taxes or keep heirs from having to pay capital gains taxes or retirement fund distribution taxes. Trusts have been and will continue to be a way to put money aside that does not have to pass through probate and can be given to your loved ones in the amounts and time periods that you choose to imply in the language of the Trust. Depending on your financial goals, an experienced attorney in Estate Planning can help you plan using trusts to meet your retirement and inheritance goals.
If you are planning how your estate will be handled at your death, starting early is key. Talk with an experienced Estate Planning Attorney to leverage your assets and skirt laws and taxes that may eat into your savings. A knowledgeable Estate Planning Attorney can walk you through all of the possibilities for future investments and inheritances and keep your nest egg safe for your retirement and beyond.