Trying to plan your North Carolina estate? Get the answers you need to protect your family.

Jackie Bedard has compiled a list of the most frequently asked questions in response those who need help protecting their families with North Carolina estate plans.
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  • What is an estate tax? How much can I leave without being subject to estate tax?

    The federal estate tax is a tax imposed on the transfer of assets and property upon death.  Think of it as an ‘everything’ tax—as in, everything you own will be counted including bank accounts, brokerage accounts, retirement accounts, real estate, personal property and automobiles, business interests, stocks and bonds and death benefits of any life insurance policies. 


    Life insurance benefits, in particular, tend to frequently be overlooked.  Many people are told that life insurance proceeds are tax-free.  And in some ways this is true, but it is also misleading.  The beneficiary of your life insurance policy will not have to pay any income taxes on the death benefits that he or she receives, but the death benefits will count as part of your gross taxable estate.

    So, for example, if you have a $1 million life insurance policy, you already have at least a $1 million gross taxable estate before we even start factoring in your bank accounts, real estate, retirement and other assets.

    Every person is allowed an estate tax exemption, or in our office we call it your estate tax “coupon.”  It is the amount that you can pass on without paying any estate taxes.  Over the past few years, the estate tax exemption and the estate tax rate applied to amounts in excess of the exemption has been fluctuating pretty significantly:

    Year

    Estate Tax Exemption

    Top Estate Tax Rate

    1997

    $600,000

    55%

    1998

    $625,000

    55%

    1999

    $650,000

    55%

    2000

    $675,000

    55%

    2001

    $675,000

    55%

    2002

    $1,000,000

    50%

    2003

    $1,000,000

    49%

    2004

    $1,500,000

    48%

    2005

    $1,500,000

    47%

    2006

    $2,000,000

    46%

    2007

    $2,000,000

    45%

    2008

    $2,000,000

    45%

    2009

    $3,500,000

    45%

    2010*

    $5,000,000 or $0*

    35% or 0%*

    2011

    $5,000,000

    35%

    2012

    $5,120,000

    35%

    2013

    $1,000,000

    55%


    *Estate of decedents who died during 2010 have the choice of using either the $5,000,000 estate tax exemption/35% estate tax rate or $0 estate tax exemption/0% estate tax rate but they must use special modified carryover basis rules that impact income tax consequences.

    So let’s go through an example to show you how this works.  Let’s assume you are single and when you add up your home, bank accounts, retirement accounts, and a life insurance policy, you estimate that your total gross estate is $1.5 million.  Under the current rules, if you were to die in 2012, your estate would not owe any estate taxes because you are under the $5.12 million estate tax exemption.  However, if you were to die in 2013, you would owe $275,000 in estate taxes! 

    Here’s what the calculation would look like:

    $1,500,000 total estate ˗ $1,000,000 estate tax exemption = $500,000 taxable estate

    $500,000 taxable estate × 55% tax rate = $275,000 estate tax liability

  • I’ve heard there’s an unlimited marital deduction for estate tax purposes, why can’t I just leave everything to my spouse and not worry about estate taxes?

    You heard correctly that there is an unlimited marital deduction, but to rely on it can potentially be disastrous depending upon your circumstances. 


    First, let’s look at the unlimited marital deduction—if you are a U.S. citizen you can leave an unlimited amount to your surviving spouse without owing estate taxes.  So, for example, if Bill Gates were to die today and leave all of his billions of dollars of wealth to his wife Melinda, his estate could make use of the unlimited marital deduction and not pay any estate taxes.  So far, it sounds pretty good, right?  The problem is that everything will then be counted in the surviving spouse’s estate and will be subject to taxes.

    Let’s go through an example.  First, let’s assume that it’s 2013 and the estate tax exemption is $1 million.  For our example, Bob and Susan are a married couple with $2 million total with $1.5 million being attributed to Bob’s retirement accounts, life insurance, etc. and the remaining $500,000 being attributed to the Susan.

    Bob dies, leaving everything outright to Susan.  He estate claims the unlimited marital deduction and no estate taxes are owned.  Susan now has the full $2 million in her name.  A few years later Susan dies and the entire $2 million is counted in her estate, but she only has a $1 million estate tax exemption. The end result?  Susan’s estate pays $550,000 in taxes unnecessarily!!!

    The good news is that a solid estate plan can include provisions to make sure that both spouses get full use of their estate tax exemptions so that as a couple, they can pass on more to their children without running into estate tax problems. 

    The key is that Bob should have left his assets to Susan in a special type of trust that would have permitted Bob’s estate to utilize his estate tax exemption and keep the funds from later counting as part of Susan’s estate.  Different attorneys and financial advisors call these trusts by different names.  In other offices, you might hear terms such as “credit shelter trust” or “bypass trust.” 

    Your surviving spouse can be the beneficiary of the trust, but it ensures that the assets in the trust will not have to be counted upon the surviving spouse’s death.  If Bob and Susan had an estate plan that included such a provision, they could have easily avoided $550,000 in unnecessary estate taxes.