ESTATE PLANNING IN NORTH CAROLINA
Federal and State
Gift and Estate Taxes
Learn about federal gift and estate taxes — what they are, how they are calcu¬
lated, and how they may be avoided or reduced.
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Although the gift tax and the estate tax are
separate taxes, both the federal and state
rules that govern them are interrelated. By
using the rules wisely, you can reduce or elim¬
inate federal estate tax liability. Additional
taxes may affect your estate plan, including
the North Carolina gift tax, estate tax, and
other taxes.
Who Needs Tax Planning?
You may need tax planning depending on
how much you own, how much you give away
each year, or both. If what you own is worth
more than $2 million (applies only to deaths
in 2006 through 2008), you may benefit from
tax planning. If what you give away is worth
more than $12,000 per year per person, you
also may benefit from tax planning. Tax plan¬
ning maximizes the use of credits, deductions,
exemptions and exclusions allowed under the
gift and estate (transfer) tax laws. Tax plan¬
ning requires knowledge of some basic con¬
cepts, federal estate and gift tax legislation,
and state tax laws.
Basic Concepts and Terms
Transfer taxes. The federal government
taxes the transfer of property between in¬
dividuals. All property is subject to transfer
taxes, including real property (real estate) and
personal property, such as bank accounts, jew¬
elry, cars, cash, stocks and bonds. If you give
away property during your lifetime, you may
be liable for gift tax. If you transfer property
at your death, your estate may be liable for
estate tax. Gift and estate taxes are called
transfer taxes because the tax is on the trans¬
fer of real and personal property.
Unified estate and gift tax. Transfers of
property, either during your lifetime or at
death, are taxed under a single taxation
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scheme — the unified estate and gift tax. The
term unified means single. A single tax rate
schedule applies to both gift and estate taxes.
A single credit also applies to both taxes. The
rules are interrelated, so that gift tax liability
incurred during your lifetime can affect your
estate tax liability. Note that the Economic
Growth and Tax Relief Reconciliation Act
of 2001 partially decoupled the estate and
gift tax, making the calculation of whether
to make a lifetime gift or a transfer at death
more complicated.
Unified credit. A unified credit is an appli¬
cable credit amount that exempts a certain
amount of property from taxes on gifts made
during lifetime or on estates passing at death.
The unified credit can be used only once, ei¬
ther during life to offset gifts or at death to
offset the calculated federal estate tax. If you
make large gifts during your lifetime, you
may use the unified credit to avoid owing gift
tax. Any unified credit amount that you use
against your gift tax in one year reduces the
amount of credit that you can use against
your gift tax in a later year. To the extent that
you use the credit during your lifetime, it will
not be available to your estate at your death.
Ask your lawyer for advice before making
large gifts .
Federal Tax Rates and Exemptions
Based on the size of an estate or a gift, certain
estate and gift tax rates apply. The Internal
Revenue Code also allows exemptions on
these taxes up to certain limits.
With the passage of the Economic Growth
and Tax Relief Reconciliation Act of 2001
(EGTRRA), the applicable estate tax exemp¬
tion amount increases until the estate tax is
repealed in 2010. Table 1 shows the amount
of property sheltered by the applicable ex¬
emption amount along with the applicable
unified credit amount for estates setded be¬
tween 2001 and 2010. To better understand
a unified credit, see the “Basic Concepts and