North Carolina Estate Tax

If the estate you’re handling is large enough to owe federal estate tax, it will probably need to pay a separate North Carolina estate tax as well. For deaths in 2011, estates with a total value of more than $5 million are subject to the state estate tax. The state exemption amount is tied to the federal exemption, which is $5 million for deaths in 2011 and $5.12 million for deaths in 2012.    

It’s not just state residents who may owe North Carolina estate tax. The estate of a nonresident may also need to file a North Carolina estate tax return, if the person owned valuable real estate in North Carolina or kept other tangible assets in the state.

Adding Up the Gross Estate

To determine whether or not a North Carolina (and federal) estate tax return is required, add up the value of the deceased person’s gross estate. Be sure to include:

• Real estate in North Carolina
• Bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Vehicles and other personal property kept in the state
• Proceeds from life insurance policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (sole proprietorship, limited liability company, or small corporation)

If any assets were owned with someone else, count only the value of the deceased person’s interest. For example, if the deceased person owned a house with her husband, include half of its value. If, however, property was owned in joint tenancy with someone else, then include the total value except for funds that the other person contributed.

Also include these assets:

• Taxable gifts made during life. If the deceased person made taxable gifts (more than the annual exclusion amount, which is currently $13,000 per year per recipient), then add the taxable amount of those gifts to the value of the estate.
• Some transfers made fewer than three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, you must include the value of the policy in the estate. 
• Assets held in a trust. The value of assets the deceased person held in a revocable living trust or other trusts the deceased person controlled is included in the taxable estate.

North Carolina Estate Tax Rates

The top North Carolina estate tax rate is 16%, far below the federal rate.

No ‘Portability’ Provision for North Carolina Couples

Federal law currently allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up all of his or her entire $5 million federal estate tax exemption, then the second spouse’s estate can use the unused portion. This is called the “portability” provision, and it’s set to expire at the end of 2012, but Congress may choose to extend it. 

Spouses cannot share their individual estate tax exemptions for North Carolina estate tax purposes.

Property Left to a Surviving Spouse

Property left to a surviving spouse is exempt from state estate tax, no matter what the amount.

Filing the Tax Return

The executor must file the North Carolina estate tax return (Form A-101) and pay any tax due nine months after the date of death, the same time that the federal estate tax return is due. You must include the first three pages of the federal estate tax return (or the whole thing, if the deceased person wasn’t a North Carolina resident) along with the state return.

If you get an extension for filing the federal return, it counts as an automatic extension for filing the North Carolina return. Similarly, if you choose to pay the federal tax in installments, you may pay the state tax in installments as well.

If you want to look at the North Carolina estate tax return and instructions, you can download them from the website of the North Carolina Department of Revenue. 

Professional Help With Estate Tax Returns

If you’re required to submit federal and North Carolina estate tax returns for the estate you’re handling, you’re dealing with a large estate and very complicated tax returns. Don’t think you can prepare these returns yourself. Hire a lawyer or CPA who has lots of experience with federal and North Carolina estate tax returns; the fee will probably be several thousand dollars, but it will be worth it. Remember that the fee is paid from the assets of the estate.