North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Yes, I know this is the North Carolina Estate Planning Blog, but in these troubled economic times, with most states, including NC, desperate for cash, this could be a sign of things to come here and elsewhere.

Washington currently has a $2 million estate tax exemption, with rates ranging from 10% to 19%.  A bill was introduced in the state legislature on February 13 to double the rates (20% to 28%).

North Carolina's estate tax is tied to the federal estate tax, so there is no tax this year.  It will return next year, however, when the federal estate tax is back, with a scheduled $1 million exemption and 55% rate.  North Carolina's top rate is 16%. 

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There is no estate tax in North Carolina this year, but residents (and owners of real estate) in 19 other states do have a state estate tax, even in the absence of the federal estate tax.  Take a look at this article on Forbes.com, Where Not to Die In 2010.

The North Carolina estate tax will return next year when the federal estate tax is reinstated.

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The Tax Policy Center of the Urban Institute and the Brookings Institution contains fascinating (to a tax geek) and detailed information about taxes.  Particularly informative is the information on the Obama Administration's 2010 income tax increase proposal.

Here's a table showing the proposed increases for 2011 and the estimated increased revenue over a 10 year period:

The tax rate increases are bad enough, but I really hate not being able to take advantage of all of my itemized deductions!  The IRS giveth, and then the IRS taketh away.

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In a recent ruling, the U.S. Bankruptcy Court for Minnesota held that an inherited IRA was protected from the debtor's creditors under federal law. In re: Nessa, 105 AFTR 2d 2010-XXXX, 01/11/2010.  The key difference between this decision and the earlier Texas and Florida decisions that held the inherited IRAs were not protected from creditors is that in Minnesota, bankruptcy debtors rely on federal property exemptions rather than state exemptions.  In many states, including Texas, Florida and North Carolina, debtors must use state exemptions. 

There has not yet been a ruling interpreting North Carolina statutory exemption for IRAs, but don't take a chance with your hard-earned retirement funds - leave them to your beneficiaries in an IRA Trust to ensure maximum protection from creditors.

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In a decision dated February 2, 2010, the North Carolina Court of Appeals upheld the Superior Court Judge's 2009 decision in Brown Brothers Harriman Trust v. Anne P. Benson, et al. Click here for my previous post about this case.

The Court of Appeals ruled that North Carolina's constitution does not require application of the common law rule against perpetuities' restriction of the remote vesting of future interests in property.  The court held that N.C.G.S. Section 41-23, which repealed the common law rule against perpetuities (in 2007), is a valid exercise of the General Assembly's authority.  Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al, No. COA09-474.

The effect of this ruling is that dynasty trusts are clearly a valid planning tool in North Carolina.  The only requirement is that the trustee be given the power to alienate (sell) the property in the trust.

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Nothing has been decided yet, but here's the scoop from TheHill.com as of February 9, 2010.  At a minimum, the 2009 $3.5 million exemption and 45% rate would continue, effective January 1, 2010.

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Here's a summary of Burton v. Williams, a recent North Carolina Court of Appeals case (adapted from today's NAELA eBulletin):

Plaintiff sued defendant as attorney-in-fact for decedent, alleging that an addendum and payment agreement release entered into between decedent and defendant regarding the sale of decedent’s property were void and unenforceable.  The grounds were that (1) At the time the documents were signed, decedent lacked the mental capacity to assent to the addendum and release; (2) the agreements were obtained through undue influence and duress; (3) they were procured through fraud; and (4) they were not supported by consideration.  After presenting his evidence, plaintiff moved for a directed verdict, and the court granted on grounds that the release was void and unenforceable for lack of consideration.  Defendant claimed this violated his right to trial by jury. However, because plaintiff established his claim through documentary evidence, which both parties stipulated was authentic and correct, the Court of Appeals ruled that the trial court properly directed the verdict in favor of plaintiff despite plaintiff having the burden of proof at trial. No consideration for the payment agreement was specified, and the document which was the basis of the agreement, as a matter of law, was not a valid contact. 

Burton v. Williams, 2010 N.C. App. LEXIS 93 (January 19, 2010)

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On February 2, 2010, in Ododonnabhain v. Commissioner of Internal Revenue, the U.S. Tax Court held that a transgender woman's expenses for hormone therapy and sex reassignment surgery were medically necessary and therefore deductible for federal income tax purposes. The court found that "gender identity disorder" is a disease, and ruled that gender transition-related healthcare is non-cosmetic, medically necessary healthcare.  However, expenses for breast augmentation were found to be cosmetic as the surgery did not treat the disease or improve bodily function, and therefore were non-deductible.

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Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax.  Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole.  No sooner said than done:

Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010.  Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property.  To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.

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