December 12, 2017
While some states levy either estate taxes on the deceased person’s estate or inheritance taxes on the heirs, neither North Carolina or South Carolina have these taxes. You will not have to worry about state estate taxes unless you inherit assets from someone who lived in a state with an inheritance tax.
Federal estate taxes are another issue, but very few estates are big enough to pay any estate taxes. That’s because there is a large exemption amount that shields most estates from any tax.
Who the Estate Tax Impacts
The federal estate tax exemption for 2017 is $5,490,000. Any estate that is valued below this amount will not pay any estate taxes.
This amount has fluctuated over time, and politicians continue to discuss either reducing the estate tax exemption or getting rid of it entirely. However, under current law the exemption is indexed to inflation with annual adjustments.
Married couples can shield almost $11 million from estate taxation with proper estate planning, by maximizing each spouse’s exemption. More advanced estate planning strategies may be able to reduce estate tax liability for even larger estates.
While not many people have to worry about estate taxes, the applicable tax rates are high. The current rate is 40%, which also applies to gifts made during a person’s life that don’t qualify for certain gift exemptions.
Do Heirs Have to Pay Any Taxes?
If your state doesn’t have an inheritance tax, you will generally receive a bequest free of any taxes. This is because the IRS doesn’t consider gifts or inheritances as ordinary income.
However, there can be some tax consequences involved in inheritances. If you inherit a capital asset and later sell it, you may have to pay capital gains tax if you sell at a profit. You should receive the benefit of a stepped-up basis, which could reduce how much tax you owe.
Inherited retirement accounts can also have tax consequences. The funds in 401(k) plans and IRAs are pre-tax money, so distributions from these plans are typically taxed as ordinary income. You may also have to meet other legal requirements if you inherit these assets, such as taking minimum distributions.
If you have any questions about the tax implications of bequeathing, gifting, or inheriting an asset, consult with an estate planning attorney.
King Law handles estate planning matters in North and South Carolina, including wills, trusts, and estate administration. Follow us on Facebook for more information and updates on legal issues.