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

In an unexpected announcement (Notice 2008-30), the IRS has stated that it will allow non-spouse beneficiaries of qualified plans (such as a 401(k), 403(b) or employer pension plan) to convert those funds directly to a Roth IRA. 

However, at least for the time being, beneficiaries of an IRA do not have this option.  Another issue is that the employer's plan must allow rollovers to a Roth, since they are not required to do so.

In most cases I recommend that employer plans such as 401(k)s be rolled over to IRAs when eligible, since IRAs generally offer better investment options and more liberal distribution rules.  In North Carolina IRAs are protected from creditors, at least for the original account owner, but this may not be true in all states.  Also, some states (not NC) offer Medicaid eligibility protection for qualified plans but not for IRAs.

The $100,000 income limitation for Roth conversions will disappear in 2010, and the tax due for the conversion can be paid in equal installments in 2020 and 2011.

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I often prepare Living Trusts for clients, who like the idea of avoiding the cost, time, and hassle of probate.  However, probate can only be avoided completely if there are no probate assets.  One type of asset that is often overlooked is vehicles.  If someone dies with only a $15,000 vehicle in his or her name, probate will often be required in order to transfer title. 

In the past clients have told me that when they have tried to transfer their cars to a living trust, the Division of Motor Vehicles requires them to pay the 3% highway use tax upon transfer in addition to the new title fee.

However, under North Carolina law, there should be maximum of only $40 due.  Thus, assuming you can get the folks at the local DMV office to agree, the cost of transferring a vehicle to a trust should be fairly reasonable, and certainly less than the cost of probate.

N.C. General Statutes Section 105-187.6 provides, in pertinent part (emphasis added):

(b) Partial Exemptions. – A maximum tax of forty dollars ($40.00) applies when a certificate of title is issued as the result of a transfer of a motor vehicle:

(2) To a partnership, limited liability company, corporation, trust, or other person where no gain or loss arises on the transfer of the motor vehicle under section 351 or section 721 of the Code, or because the transfer is treated under the Code as being to an entity that is not a separate entity from its owner or whose separate existence is otherwise disregarded, or to a partnership, limited liability company, or corporation by merger, conversion, or consolidation in accordance with applicable law.

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Last week the North Carolina Senate produced its version of the state budget, which included:

• Reducing the state sales tax and the top income tax rate each by 1/4 percentage point, eliminating the last of a 2001 increase in both taxes. This would bring the highest income tax rate down to 8%.  The top rate only applies to those with income over $120,000 per year. The House version of the budget did not reduce either.

        - While the sales tax cut would benefit everyone, a quarter percent would not provide significant relief for anyone.  A low-income person spending $10,000 annually on items subject to sales tax would only save $25 over the course of the year!  Likewise, the cut in the income tax will not produce appreciable savings for high income earners.  For someone with taxable income of $220,000 per year, there would be a savings of just $250.  A taxpayer with income of $150,000 would pay only $75 less.  Not that I'm complaining....

• No state version of the federal Earned Income Tax Credit and no funds to help counties pay their share of rising Medicaid costs. The House version did both.

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Attorney Bill Graham of Salisbury is rallying folks against North Carolina's high gas tax rates.  Check out the story on the News and Observer website.  North Carolina has one of the highest gas taxes in the country, but there are valid arguments for keeping the tax as it is.  It is a "fair"  tax in that the persons who use the roads the most pay the most taxes.

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