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 the gift tax? How much can I gift without being subject to gift tax? How much can I gift during my lifetime?

    Estate Planning PitfallsBelow, we address how the gift tax rules work and the current exemptions. However, I want to caution you to first ask yourself what your objective is in making gifts. Sometimes well-meaning professionals, family members, and friends provide advice without being aware of the whole picture, including your unique circumstances and your overall estate. There are a few common traps that we see people fall into:

    Gift Tax Trap #1: Future Nursing Home Care & Medicaid Eligibility

    Just because the IRS allows you to make a gift, does NOT mean that Medicaid will allow the gift. Thus, if you are concerned about the possibility of future nursing home costs, you should consult with an elder law attorney before making major gifts. For Medicaid eligibility of help with nursing home bills, there are significant penalties for gifts made within 5 years of needing nursing home care. To read more, check out The Ultimate Guide to Paying for Nursing Home Care in North Carolina.

    Gift Tax Trap #2: Outdated Tax Planning Advice

    We still frequently meet with people that are working off of outdated advice. A long time ago their tax preparer advised them to make annual gifts to their family members in order to reduce the overall size of their estate and minimize potential estate taxes upon their death. The reality is that for many, this is no longer necessary (see below) and potentially can backfire dramatically if you eventually need nursing home care (see trap #1 above).

    Gift Tax Trap #3: Liquidating Appreciated Assets

    If part of the process of making your gift involves liquidating an asset that has significantly increased in value since you purchased it--for example, a house or a stock portfolio--you may be subjecting yourself to capital gains taxes that could be avoided if the property conveyed through your estate planning instead.

    If any of these concerns apply to you, you owe it to yourself to contact an attorney--one with extensive experience with Estate Planning and Elder Law matters in your state.

    Now, back to how the Gift Tax works...

    Who Pays Gift Tax?

    The gift tax is a tax on the transfer of assets from one person to another.  The gift tax is a tax that is paid by the gift giver (referred to as the “donor”) rather than the gift recipient (referred to as the “donee”).  Also, a gift does not constitute income for the recipient and is not subject to income tax.

    What Is the Annual Gift Tax Exclusion Amount?

    The gift tax law provisions for an annual gift tax exclusion—i.e., an amount that you can give away per person, without having to file a gift tax return or owing any gift taxes.  As of 2019, the annual gift tax exclusion is $15,000 per person, per year (and the law provides that it be increased periodically to keep up with inflation).  So, for example, if you are a parent with three children, you could make a gift of $15,000 to each child and not owe any gift taxes.

    Furthermore, if you are married, a husband and wife can agree to “split gifts”—i.e., half of the gift will be allocated to each spouse.  So, for example, if you are married and have three children, if your spouse agrees to gift splitting, you can gift up to $30,000 per child and it does not matter whether the assets came just from you or from both you and your spouse.

    What Is the Lifetime Gift Tax Exclusion Amount?

    In addition to the annual gift tax exclusion, there is also a lifetime gift tax exemption.  Note that while the annual exclusion is per donee (i.e., gift recipient), the exemption is per donor—in other words you, as the gift giver, only receive one lifetime exemption.   

    It’s also important to understand how this exemption interacts with estate taxes.  Under our federal estate tax system, every person is permitted to pass on a certain amount without being subject to estate taxes—this is referred to as the estate tax exemption, or in our office, we like to call it the estate tax “coupon.”

    The lifetime gift tax exemption and the estate tax exemption are linked together, such that if you use a portion of your lifetime gift tax exemption, your estate tax exemption will be decreased dollar for dollar.

    In 2019, the lifetime gift tax exemption and estate tax exemption are both $11.4 million (though this is set to expire on December 31, 2025 and is always subject to change by Congress. The tax rate on gifts above $11.4 million is 40%.  For example, if your total estate is $12.4 Million, your estate tax exemption can be used to shelter the first $11.4M from estate tax (assuming you didn’t use your exemption during lifetime—see below). The remaining $1M would be taxed at 40% resulting in a $400,000 estate tax bill.

    Estate Tax & Gift Tax Are Linked

    The Estate Tax Exemption and the Lifetime Gift Tax Exemption are linked together. Any portion of your Lifetime Gift Tax Exemption used will reduce your available Estate Tax Exemption upon death. For example, if you use $2M of your lifetime gift tax exclusion during your lifetime, then upon death your estate tax exemption amount will be reduced by $2M. 

    Does North Carolina Have a State-Level Gift Tax or Estate Tax?

    No. North Carolina repealed the state-level estate tax effective January 1, 2013.

    Need to Discuss Your Tax & Asset Protection Planning?

    In our years of experience working with thousands of individuals in the Wake County area, we find that asset protection planning is particularly important if any of the following apply:

    • You own a home and have an estimated net worth of $1M or more;
    • You own vacation property;
    • You own rental property;
    • You are high income-earning professionals;
    • You are high income-earning business owners;
    • You own a business with significant value.

    Don’t leave yourself or your loved ones stuck dealing with the financial aftermath of avoidable taxes, a lawsuit, long-term care costs, or an unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 443-3035 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish request a free copy Jackie Bedard’s book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.

  • 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.

  • What’s The Difference Between An Administrator, A Personal Representative, And An Executor?

    Man who is named the executor of an estateIf you have found yourself in charge of administering a loved one's estate, you might be wondering about the differences between an executor, personal representative, and an executor and what responsibilities you have. All of these titles essentially refer to a person appointed by the court to administer the deceased’s estate. Let's take a look at each one and discuss.

    What is an Executor of an Estate?

    Executor (or executrix if female) is the traditional term for the person named in a will (and subsequently appointed by the probate court) to oversee the estate of a person who has died with a will.  Some states have now adopted statutes that replace the term “executor” with “personal representative” so the terms are often used interchangeably.

    What is the Administrator of an Estate?

    An administrator or administratrix is the person appointed by the probate court to administer the estate of a person who has died without a will (intestate).

    If I’m Named An Executor Or Personal Representative In The Will Can I Start Administering The Estate?

    No.  You must first file the will with the probate court, establish the will’s validity, and be formally appointed as executor or personal representative.  Before rushing off to the court house, you should be sure that you have the correct will.  Sometimes a family member will find a will, assume it’s the right one and head on down to the court house only to later discover that there is a more recent will or trust that replaced the revoked the prior will.

    Important Keys To Being Executor: Do Things The Right Way

    Serving as Executor or Trustee can be a difficult and sometimes thankless role if the Beneficiaries do not understand the significant responsibility that you have had bestowed upon you.

    Communicate with Beneficiaries

    One of the biggest complaints that Beneficiaries raise is lack of communication. Insufficient communication often leads to inappropriate expectations or assumptions on the part of the Beneficiaries which can quickly escalate into a full-blown dispute.

    The best course of action is to communicate with the Beneficiaries early and often. Don’t be afraid to repeat yourself and don’t hide information because you are concerned that it might hurt someone’s feelings. However, do seek to convey information in a thoughtful and empathetic manner. If a Beneficiary has been disinherited or is inheriting less than they may have anticipated, it’s okay to acknowledge that you understand their disappointment. Many Beneficiaries may have formed some sort of assumption about the size and nature of your loved one’s estate which may be inaccurate. For example, there may be significantly less assets than anticipated or significantly more debts than anticipated.

    We’ve seen estates where the Decedent had previously received a rather large inheritance or windfall, leading the Decedent’s Beneficiaries to assume there would be a large inheritance, only to discover that the Decedent had squandered most of the windfall or inheritance. In other estates, we’ve seen a Decedent who had the outward appearance of wealth, only for the family to discover that they were significantly in debt and had very little, if any, positive net financial worth.

    Estate Administration Organization is Key

    Estate Administration involves a significant amount of paperwork. It is critical that you stay organized. Maintain a calendar with all appointments and deadlines. Clear and organized record-keeping will also reduce the likelihood of estate disputes. From time to time during the Estate Administration process, you may be required to produce certain documents or receipts. Being able to produce them in a timely and organized manner will keep the Estate Administration advancing in an organized and efficient manner.

    Follow the Law

    This might sound obvious, but you’d be surprised how many Executors and Trustees don’t understand or follow their legal duties. The North Carolina General Statutes set forth specific rules regarding the Estate Administration process that govern:

    • Properly determining the validity of the Decedent’s Will and/or Trust;
    • Properly interpreting the terms of the Decedent’s Will and/or Trust;
    • Various required Court filings and accountings;
    • Properly notifying known and unknown creditors of the Estate;
    • Properly settling claims of the Estate;
    • Proper filing of applicable tax returns and payment of taxes owed;
    • Proper notification to Beneficiaries or potential Beneficiaries of the Estate; and
    • Priority of distributions of the Estate if there are not enough assets in the Estate to meet all distributions specified in the Will or Trust.

    Remember, as Executor or Trustee you are personally liable for complying with the law—meaning that if you make a mistake, you could be held responsible by a Court to correct the error.  If such error caused financial harm to the Estate, then you would need to reimburse the Estate from your personal savings to correct the error. Therefore, many Executors and Trustees hire a law firm to assist them with the Estate Administration process. By hiring a reputable law firm to assist you, you limit your liability exposure by shifting your liability to the law firm’s professional malpractice liability.

    Take Care of Yourself

    Remember, this is a marathon, not a sprint. Don’t expect to complete the Estate Administration overnight. In addition to grieving the loss of a loved one, chances are that you have other responsibilities such as family obligations, a job, etc. Again, hiring a law firm to assist you can help ease some of the administrative burden so you can get back to your day-to-day responsibilities.

    Request Our Free Guide About Estate Administration

    Free guide on estate administrationAs explained in our guide, Understanding Estate Administration, the appointment of the executor, administrator, or personal representative is addressed during the Legal Authority phase of an estate administration. Request your copy to learn more about the estate administration process in North Carolina. 

    If you are personally involved in a North Carolina probate or estate administration, or if you want to make sure your own estate is protected, please call us at (919)443-3035 or contact us online. We will help you identify the next steps to take, and we'll connect you with resources that can help.