Why would an individual renounce or disclaim an inheritance in North Carolina? An inheritance may not always be expected and it may not be desirable for the beneficiary. Certain assets, like real estate or personal items, may require complicated or expensive maintenance that the beneficiary does not want to manage. An inheritance may also come with a heavy tax burden. For senior citizens, an inheritance could affect their eligibility for Medicaid benefits. Instead, a beneficiary may want another family member to receive their inheritance.Continue Reading...
Family members have the best intentions when they offer money to cover college expenses, but if they neglect to use a wise gifting strategy they could affect the student’s eligibility for federal aid. With hundreds of higher education institutions, state and private universities in North Carolina, students have no shortage of options. However, the cost of college can range from several thousand to over $45,000 per year.Continue Reading...
Yesterday I blogged about North Carolina's controversial Amendment One, which ended up passing by a large margin. I also have some thoughts about another matter in the headlines - the John Edwards trial. I have not been following the case closely, but I do know that central to the case is the money received in 2007 from wealthy donors Fred Baron and Bunny Mellon, Edward's knowledge of the donations, and whether they constituted campaign funds or simply gifts. Edwards former speechwriter Wendy Button testified that Edwards told her that the money was legal because the donors had paid gift taxes.
However, the matter of the gift taxes is not so simple. In 2007, the federal gift tax exemption was $2 million, meaning the Baron and Mellon could have each given someone that amount without paying any tax, provided they had not previously used up the exemption. In any event, a federal gift tax return would be required to report the gift to the donees since it exceeded $12,000 per person. But exactly who were the donees? John Edwards? He certainly benefited from the gifts, since they helped hide Hunter's pregnancy, even if he didn't receive anything himself. Rielle Hunter was certainly a donee, as she received. at least, free rent and a BMW. Andrew and Cheri Young? They apparently kept most of the money to build themselves a house.
So, if Baron and Mellon filed gift tax returns as required, whom did they list as donees? Somehow I doubt the correct names and amount were on the returns. Were the returns later amended to correct the information?
And what about subsequent gifts of the same money? Did Edwards effectively make a gift to Hunter? To the Youngs? Was there a gift from the Youngs to Hunter? Any such gifts in excess of $12,000 would also required to be reported, and the estate tax exemption of the donors would be reduced by the amount of the gifts..
Edwards and anyone else considered to be a North Carolina resident would also be required to report the gift to the North Carolina Department of Revenue, as North Carolina still had a gift tax in 2007 and 2008. In fact, North Carolina's lifetime exemption was just $100,000, and that only applied to close relatives. That means North Carolina gift tax would have been due.
Only a tax lawyer would think about such things - but, the tax laws are laws too, and they should be enforced. I would like to see how this would all unravel if the IRS and NCDOR conducted audits of those involved.
This will certainly make estate tax planning and Medicaid planning easier (and less expensive, in some cases) for North Carolinians. I personally will miss the NC gift tax, since I enjoyed advising people about its peculiarities as compared to the federal gift tax. After all, it it weren't for taxes, my job would be much less interesting!
Most North Carolina residents and even many attorneys aren't even aware of the NC gift tax. In my practice I have learned of many, many gifts that have been made over the years and not reported as required.
If the General Assembly ultimately decides to keep the gift tax, I believe they should provide funds to the Department of Revenue to hire me as a consultant! I have a few ideas that would result in a marked increase in tax collected.
If you would like to see the gift tax repealed, please email or call the office of your legislators and ask them to support repeal of the gift tax, effective 1/1/09. Go to www.ncleg.net and look under House Finance committee for names and email addresses of finance committee chairs.
The Revenue Laws Study Committee of the North Carolina General Assembly is taking a look at reforming the North Carolina Gift Tax. I previously blogged about House Bill 235, describing the proposed changes. In general the NC Gift Tax would be made similar to the federal gift tax, with a $1 million lifetime exemption. The bill stalled last year, but is under study once again.
On February 15, 2007, bill H235 was introduced in the North Carolina General Assembly to reform the North Carolina gift tax so that it would be based on the federal gift tax. Under the proposed legislation, NC gift tax would only be due if federal gift tax is due. The change would be effective January 1, 2007. Click "Continue Reading" to see the text of the bill.
Under current law, North Carolina allows the same $12,000 annual exclusions as the federal system, but rather than a $1 million lifetime exemption, there is only a $100,000 lifetime exemption, which applies only to ancestors and descendants.
The NC gift tax catches many residents (and even professional advisors) unaware, and many gifts are never reported, mainly because of ignorance of law, so the reform is probably a good idea. I'm not sure how much tax revenue would be lost.
I recently had a client come in who had made a gift of over $120,000 to her brother several years ago, using funds that had originally come from their mother. She used the mother's accountant in Florida to prepare her gift tax return. The accountant, apparently unaware that North Carolina had a gift tax, failed to prepare an NC gift tax return or advise her about the tax.
The North Carolina Department of Revenue, by checking the federal gift tax returns filed by NC residents, became aware of the federal return and contacted my client. She now faces penalties and interest in addition to the tax due.
North Carolina allows the same $12,000 annual exclusions as the federal system, but rather than a $1 million lifetime exemption, there is only a $100,000 lifetime exemption, which applies only to ancestors and descendants.
I have seen other clients incur unexpected tax liability when their advisers were ignorant of NC gift tax laws. If you are considering make any large gifts, make sure you seek qualified tax counsel so that you don't have any unpleasant surprises down the road. The taxman will cometh!