North Carolina Estate Tax: Should You Be Concerned?

The federal estate tax may be something that only affects a relatively tiny number of estates each year, but it’s still a tax that most people would like to avoid whenever possible. That’s why the tax itself has been a cause for debate for many years now. Some in North Carolina have worried about this tax as well, since it can impact any estate that meets that $5.49 million threshold. Fortunately, the North Carolina estate tax is no longer a concern, since that tax was repealed in recent years. However, there may still be cause for some in the state to be concerned about the impact of federal and state estate taxes.

North Carolina’s Tax: Gone but Not Forgotten

Most residents of the state know that North Carolina’s estate tax was repealed as part of a larger tax deal several years ago. That repeal was signed by former Governor Pat McCrory, and went into effect in 2013 thanks to the retroactive provision in the law. That retroactivity was a boon for more than one North Carolina family that suddenly discovered that the estates they inherited would no longer be subject to that tax.

Still, estate tax laws have changed multiple times over the years, especially at the federal level. At one time, provisions in federal law provided a mechanism through which states could sponge off the federal tax owed by estates. When the Congress changed that law, many states stopped collecting estate taxes at the state level, while others crafted their own independent laws to replace the old system. Today, many states now have their own state estate tax laws, and continue to assess estate taxes for those estates that qualify.

So, while there is no current estate tax in the state of North Carolina, there are also no guarantees that a future Governor and legislature won’t recreate the tax later. If you’re wondering what that means for your estate planning, it’s simple: you should make your plans with that uncertainty in mind. The fact is that your estate will be subject to any future estate tax if one exists when you die. The only way to ensure that your estate can avoid that situation is to use estate planning now to limit the estate’s exposure to any future estate tax that might come into existence.

The Federal Tax Is Still There

It’s also important to remember that the federal estate tax is still in effect. While the estate tax exemption continues to increase with each passing year, the tax will still affect many Americans’ wealth in the coming years. It is true, of course, that there are forces in Washington today who have pledged to seek the total repeal of that tax. Still, previous calls for a total repeal have failed to meet with much success.

Moreover, even if that tax were to be repealed it would not mean that it was gone forever. Laws are by their very nature impermanent things, and taxes that are repealed today may be passed anew tomorrow. As a result, it’s risky to make your plans with the expectation that the situation of today will abide for all time. The reality is that those kinds of expectations can leave your estate vulnerable to unexpected policies that could severely impact the inheritances that your heirs ultimately receive.

Sound Planning Matters

The best way to deal with any estate tax concern is to ensure that your estate plan properly organizes your assets in a way that minimizes any tax’s impact on your wealth. The good news is that you can use various estate plan strategies to reduce your estate’s exposure to the estate tax and protect your wealth so that more of it can be enjoyed by your heirs rather than being taken by the government:

• Making use of the marital deduction. Married couples can leave each other as much wealth as they want, and that gift is tax-free. There can be drawbacks of course, since your spouse will eventually pass away too. At that point, the estate taxes that were bypassed through that transfer may impact the spouse’s estate instead.
• Trusts can be one of the best ways to address estate tax concerns. It’s important, though, to ensure that you’re using the right kind of trust.  A revocable trust can provide some protection if it leaves money (up to the estate tax exemption) to an irrevocable trust for your spouse on your death.  Often, though, individuals will create trusts that are irrevocable during their lifetimes to protect from estate taxes.  This type of irrevocable trust completely removes assets from your estate so that they aren’t counted during any tax calculation.
• Use the annual gift exclusion too. That allows you to gift up to $14,000 a year (as of 2017) to any individual without any tax concerns. Since your spouse can gift the same amount to the same person, and you can each give to as many different people as you’d like each year, you can substantially reduce the value of your estate before you die just through gifting alone.

The Comprehensive Approach

The key to avoiding estate tax concerns is to transfer as many assets as possible while you’re still alive. By using a combination of these different strategies, you can do so without tax implications, and ensure that you minimize your estate’s future exposure to the estate tax while getting assets to heirs in an efficient manner. While you may not be able to avoid all federal estate taxes or potential future state taxes, you can succeed in reducing those tax bills in a significant way.

The North Carolina estate tax may be off the books for now, but the federal tax can still require strategic thinking if its impact is to be avoided. Still, estate tax strategies can be complex, and mistakes can end up being quite costly. To avoid errors, it’s important to have professional help of the kind that you can find at the Potter Law Firm. If you’d like to learn how our team can help you to minimize your estate’s exposure to estate taxes, contact us online or call us today at (704) 944-3245.