When some people learn that North Carolina does not impose a specific estate tax or inheritance tax, they think they don’t need to worry about the potential tax liability in their estate plan. However, this is a big mistake. In addition to federal estate taxes, many other forms of taxation could seriously deplete resources if you do not incorporate the right preventative strategies in your estate plan.
Estate taxes can pose a serious challenge for families who have a business they want to pass to the next generation. The IRS describes estate tax as a “tax on your right to transfer property at your death” and that property can include everything associated with the business.
The federal government looks at the market value of everything you own at the time of death, makes some adjustments for expenses and large gifts, and comes up with a taxable estate amount. If that amount is below the filing threshold for that year, then the estate does not need to pay the tax. That amount is currently almost $13 million, but it changes every year, and lawmakers may decide to lower the amount substantially to capture more revenue. Anyone who could potentially face estate tax liability should take steps to minimize the impact.
Capital gains taxes impose liability on the amount property appreciates in value over the cost basis. Laws pertaining to these taxes are complex and subject to frequent change. Currently, when individuals inherit certain types of property, they get a break on capital gains liability because their basis in the property “steps up” to the market value at the time they take ownership. However, this rule has been repealed in the past and could well become extinct, so it is wise not to count on it.
When a family member has joint ownership of an asset and then becomes the sole owner after the co-owner dies, rather than becoming the owner by inheriting it, they may be liable for tax on the full amount of appreciation if they later want to sell that property, so it is critical to look at ownership strategies. Capital gains taxes can affect certain trusts and other property as well.
Other Tax Concerns
Many families have traditionally passed on wealth through inherited IRA accounts. Distributions from these accounts are taxed as income since the accounts were built with pre-tax funds. Until recently, individuals who inherited IRA accounts could spread out the distributions over the projected course of their lifetime. Now the government has accelerated distribution rates which can cause substantial jumps in the recipient’s income tax liability.
It is important to consider strategies for minimizing the potential income tax for recipients, and also methods that could decrease income tax liability for the person creating the estate plan, their estate, and any trusts.
We Create Strategies Based on Your Unique Situation
With many different tax issues to consider, and unique family issues and financial circumstances, it doesn’t make sense to rely on a one-size-fits-all approach to estate tax planning. You deserve a strategy custom-built for your specific needs.
At Salines-Mondello Law Firm, PC, we understand all the factors that impact the tax liability of your estate, trusts, and family resources. We work closely with you to understand your goals and develop a plan to reduce estate and other tax burdens. Contact our team today to learn how we could ensure that your estate plan minimizes tax liability.