HOW MUCH CAN PASS FEDERAL ESTATE TAX FREE IN NORTH CAROLINA?

A Look at the Federal Estate Tax and How Much Assets You Can Transfer Before You are Exposed to Estate Taxes in North Carolina

MARK O COSTLEY
NORTH CAROLINA ESTATE PLANNING ATTORNEY
How Much Can Pass Federal Estate Tax Free in North Carolina?

The average American citizen is probably unaware of the fact that asset transfers, even if they take place between parents and children, are subject to federal transfer taxes. Yes, gifts that you give to your children and anyone else for that matter are subject to the federal gift tax. Bequests that you leave behind to your loved ones are subject to the federal estate tax. Why don't you get a gift tax bill after you buy your family gifts over the holidays? This is because there are exclusions. When it comes to gifts, there is a $14,000 per year, per person gift tax exclusion. You can give gifts totaling this much to any number of gift recipients during a given calendar year without incurring any gift tax responsibility. If you were to give gifts to people that exceed $14,000 per person in a year you could still give the gifts tax-free, but you would have to use some of your unified estate-gift tax exclusion.

UNIFICATION OF ESTATE AND GIFT TAXES

The gift tax and the estate tax are said to be unified by the Internal Revenue Service. During the current calendar year the amount of the unified gift and estate tax exclusion is $5.25 million. As a result, if you gave a gift to someone that exceeded $14,000 within a particular year you could use some of this $5.25 million exclusion to give the gift in a tax-free manner.

How Much Can Pass Federal Estate Tax Free in North Carolina?

However, you would be reducing the amount of your available overall exclusion. For example, let's say that you give your daughter a beach house as a gift. The house is valued at $1,264,000. You could use your $14,000 per person annual gift tax exclusion, so the gift for tax purposes would be $1,250,000. If you wanted to give the gift tax-free, you could use a portion of your $5.25 million exclusion. After the completion of this gift you would have $4 million left to apply to future gifts and to your estate.

FEDERAL ESTATE TAX RATE

The maximum rate of the federal estate tax sits at 40 percent. Because of the fact that the estate tax and the gift tax are unified this top rate also applies to the federal gift tax. We also have a generation-skipping transfer tax in the United States. This tax is applicable to asset transfers to family members who are more than one generation younger than you, or non-family members who are at least 37.5 years younger than you. The maximum rate of this tax is also 40 percent.

MEMORY LANE
Let's look at the back story with regard to this $5.25 million exclusion and 40 percent maximum rate. The estate tax was repealed throughout 2010 because of provisions contained within the Bush era tax cuts. Those cuts were going to expire at the end of that year. If this would have taken place the estate tax would have returned in 2011 with a 55 percent top rate and a $1 million exclusion. Throughout the year the estate planning community was operating in a grey

How Much Can Pass Federal Estate Tax Free in North Carolina?

area because a new tax relief act could be passed that changed these parameters, but there were no guarantees. It is difficult to plan ahead effectively you aren't certain about the parameters that you are going to be working with during the next calendar year. As it turned out the $1 million exclusion and 55 percent maximum rate scenario never materialized because of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Under the terms of this act the estate tax returned in 2011 with a $5 million exclusion and a 35 percent maximum rate. It allowed for an adjustment for inflation to be applied in 2012. After the adjustment was added the 2012 estate tax exclusion was $5.12 million. We stated above that the Bush era tax cuts expired at the end of 2010. In a similar manner, this tax relief act that was passed at the end of 2010 also had an expiration date. It expired at the end of 2012. So, we had uncertainty again throughout the 2012 calendar year. Once again, if no fresh legislation was passed changing the lay of the land the estate tax exclusion would go down to $1 million, and the top rate would rise to 55 percent in 2013. We were spared this fate when the American Taxpayer Relief Act of 2012 was passed in the 11th hour. Though it is called a tax relief act it actually raised the top rate of the federal estate tax, the gift tax, and the generation-skipping

How Much Can Pass Federal Estate Tax Free in North Carolina?

transfer tax to 40 percent. It allowed for a resumption of the same $5 million exclusion that was installed for 2011 with ongoing inflation adjustments. The 2013 figure of $5.25 million reflects the annual adjustment.

CONCLUSION
You can pass $5.25 million in 2013 without incurring any transfer tax liability. If you have assets that exceed this amount you should discuss tax efficiency strategies with a licensed estate planning attorney. There are various different legal devices that can be utilized to mitigate your exposure. Your attorney will gain an understanding of your unique personal situation and make the appropriate recommendations.

REFERENCES
Internal Revenue Service http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Estate-andGift-Taxes Forbes http://www.forbes.com/sites/deborahljacobs/2013/01/02/after-the-fiscal-cliffdeal-estate-and-gift-tax-explained/

How Much Can Pass Federal Estate Tax Free in North Carolina?

About the Author

Mark O Costley With more than nineteen years experience in private practice, Mark Costley has helped hundreds of North Carolinians with estate planning, living trusts, financial law and probate, estate and trust administration. A partner with one of the largest and most vibrant estate planning practices in the Research Triangle area of North Carolina, Marks areas of practice are estate planning, trust and estate administration, planning for children and adults with special needs, business succession planning and business transactions, representation of non-profit organizations, family charitable and philanthropic counseling, civil dispute mediation, and business, estate and trust litigation. Marks work involves elements of teaching, strategic analysis and planning, negotiation, documentation, and assisting clients in executing their plans. Mark is devoted to providing clients with the best in estate planning, estate administration and financial services law. Mark is also a certified court mediator. Mark was drawn to and estate planning and financial planning law because of a passion for helping clients and their families avoid problems and helping them to have the necessary tools to preserve their wealth, prepare for the future and deal with problems when they do arise. Consistent with the philosophy of Walker, Lambe, Rhudy & Costley, P.L.L.C. to be Your Counsel, Mark and his colleagues in the Estate Planning Group strive to have strong relationships with clients and their families in order to be of the greatest assistance possible when legal counsel is needed. Walker Lambe Rhudy Costley & Gill, PLLC www.organizeyourassets.com Palladian Corporate Center 240 Leigh Farm Road, Suite 100 Durham, NC 27707

How Much Can Pass Federal Estate Tax Free in North Carolina?