inheritance tax nc

Is There an Inheritance Tax in North Carolina? An In-Depth Inheritance Q&A

Every year in the United States nearly 3 million people die. We’re not trying to shock or scare, this is simply a fact of life (or rather death).

And while death is an extremely emotional time for the loved ones who are left behind there is also a practical element to any death. This is because death often comes with inheritance. Houses and heirlooms get passed on to the next generation.

If you don’t know what to do when you inherit property you could end up wasting it. In fact, one-third of Americans blow their inheritance within a short space of time. 

So you need to know everything about inheritance and inheritance tax in NC. That’s where we can help. Read on to find out all about North Carolina inheritance tax and what to do when you inherit property.

How Do You Pass Property on After You Die?

Let’s start at the very beginning. In order to pass a property on after you die you need to make a will.

Anyone with a valuable estate should consider making a will. This especially true if you don’t have obvious family or friends to inherit your estate. Or if you want to specifically leave people out of your will.

If someone names you in their will then you will inherit some or all of their property. How much you inherit depends on the stipulations in their will. For example, they might request for their estate to be divided up equally among the beneficiaries in which case you get an equal share.

But in order to inherit a will must be valid. So what does this mean?

A will’s validity depends on a few factors. Only people over the age of 18 can create a will, but this isn’t the only stipulation. In North Carolina, a valid will must also:

  • Be drawn up with the help of a lawyer, signed by the testator (the person whose will it is) and witnessed by at least two people.
  • Be created while the testator is of sound mind and without any undue pressure.
  • Not be fraudulent.

The will’s lawyer and witnesses can help to ensure its validity. But if you have any concerns or suspicions, it’s important to raise them as soon as possible with a lawyer.

Who Can Inherit Property? 

The short answer is anyone can. If a valid will names you as a beneficiary then you inherit – whether you’re family, a friend or even a stranger. Although obviously, it’s rare that someone would leave their property to a stranger.

But a will can also disinherit you. Anyone can disinherit members of their family or spouse in their will, either directly or indirectly by not leaving them anything. However, in North Carolina, a disinherited spouse can make an appeal for an ‘elective share‘ of the deceased’s estate.

The law also views divorced spouses as disinherited. This applies if the couple divorced but the spouse did not make a new will. 

In this circumstance, the law assumes that the divorced spouse would have been disinherited in a newer will. They cannot appeal for an elective share of the estate.

In a similar way, the law assumes that if any children are not mentioned in the will then they have been intentionally disinherited. However, this doesn’t apply to children born after the will was made. Provided they haven’t been left any other asset in the will, they can also inherit the property.

But what if the deceased never made a will?

What Happens When There Is No Will?

If someone dies without making a will, then their property gets passed onto their surviving family. The bulk of the estate will pass onto the surviving spouse if there is one.

In the case of no will, the portion that a spouse receives is less if the deceased also has surviving children or parents. When this happens, the child or children also get a share of the estate and of their parent’s personal property. But if the deceased isn’t survived by a spouse or children, then the property goes to other relatives in this order: 

  1. The deceased’s descendants (grandchildren, great-grandchildren and so on.) 
  2. Parents
  3. Siblings of the deceased (in age order)
  4. Nieces or nephews
  5. Aunts or uncles
  6. Cousins

In some cases, it can take a long time to track down the inheriting relative and this requires patience from the other surviving relatives.

So what happens next? What do you do once you know that you’re inheriting?

How Do You Divide Up Inherited Property? 

The deceased’s lawyer will contact you to inform you that you are a beneficiary of their will and inform you about what you’ll inherit. If this is property one of two things will happen.

If you’re the sole beneficiary then the property is yours to do with as you please. But if you inherit the property along with your siblings, children or other relatives this process is less straight forward. In this case, you have several options.

  1. You can sell the house and divide up the money you get from the sale between the beneficiaries.
  2. You can rent out the house and divide up the rent you get among the beneficiaries.
  3. You can keep the house and decide who gets to move into it or use it as a communal property. For example, if it’s a house by the sea you might choose to keep it as a family holiday residence.
  4. One beneficiary can decide to buy out the others and take sole ownership of the property.

The second two options are fairly complicated and may take longer to decide on. But all of these options require consensus from everyone who is set to inherit.

If you decide to sell the property and divide the money between you then this will be split according to the terms laid out on the will.

For example, let’s say the surviving spouse inherits 50% of the house and the surviving children inherit the rest. After the sale, the spouse will get 50% of the money taken and the siblings will then divide up the remaining 50% between them. So if there are four siblings, they will each inherit 12.5% of the house’s selling price.

For more information on selling your inherited property, check out this blog

But inheriting property and selling inherited property isn’t as simple as getting a good deal and sharing the money out. In some cases, you may have to pay Inheritance Tax, which can be a huge financial cost. 

What Are Inheritance Tax and Estate Tax? 

Inheritance tax does what it says on the tin. It’s a tax that you pay on any type of asset that you inherit.

So if you inherit a house, you might have to pay a portion of the property’s value in inheritance tax. But this also applies to any assets of a certain value. For example, you can also pay inheritance tax on financial assets passed on through bank accounts or on heirlooms of particular value. 

But you only have to pay inheritance tax after you receive your inheritance. Instead of inheritance tax, some states charge Estate Tax. This works in the same way as inheritance tax, but you have to pay it before receiving your inheritance.

As such, any type of North Carolina estate tax could create financial difficulty for a will’s beneficiaries. If you can’t pay the estate tax you may not be able to access your inheritance.

So in comparison, paying inheritance tax might be a more favorable option. That way you can use some of your new inheritance to pay off the tax once you receive it.

But inheritance and estate tax both vary depending on a few factors. The amount you have to pay will vary depending on the value of your inheritance. But where you live will also affect what you pay, as different states have different inheritance tax laws.

We can guess what you’re wondering now! Does North Carolina have an estate tax or an inheritance tax?

How Does Inheritance Tax in NC Work?

If you inherit a property in North Carolina then you’re in luck! The state does not charge inheritance tax to anyone inheriting within the state.

They also don’t charge estate tax, which means you can get access to your inheritance easily. Provided the will is valid or you’re the rightful beneficiary of the estate, it’s yours.

Until 2013, North Carolina charged estate tax but the state repealed this in July that year. The repeal was also retroactive. So anyone who inherited property from January 2013 onwards doesn’t have to pay inheritance or estate tax.

This makes it one of the best states to inherit property in. Currently, 32 states across America don’t have an inheritance or estate tax. 

What Happens with Federal Inheritance Tax in North Carolina?

No inheritance tax in North Carolina sounds dreamy, right? Well, it is and in most cases, you won’t have to pay tax on a property that you inherit thanks to the state laws. But a handful of people may still end up paying inheritance tax.

This is because, while the state doesn’t charge tax, there is still a federal estate tax, which applies in some cases of inheritance. Fortunately for most people, this tax only applies when the property you are set to inherit is worth an enormous amount.

The base tax for federal inheritance tax is $345,800. This means that if the federal government deems your inheritance big enough you will have to pay this.

At the moment, federal law exempts $11.18 million worth of inheritance from inheritance tax. This means that anything within $11.18 million will not be subject to tax when you inherit it. And this also means that if you inherit over $11.18 million you only have to pay inheritance tax on the portion that exceeds this limit.

For example, let’s say the property you are due to inherit is worth $15 million. After subtracting the federal tax exemption, there is $3.82 million. This is the amount that the federal government can tax.

Your tax rate depends on how much you inherit outside of the exemption. These rates can range from 18% right the way up to 40%. 

An inheritance of $3.82 million falls in the highest tax rate so you would have to pay 40%. That comes to $1.52 million. Together with the base tax, your federal tax would be $1.87 million.

But it’s unlikely that any property you’re set to inherit will be worth over $11.18 million! So you should still be in the clear. 

What If You Need Financial Support While Inheriting? 

Inheriting a property can be a huge relief for some people. It can offer financial stability and a place to live. But sometimes the process takes longer than expected.

If you already find yourself in financial hardship, waiting for your inheritance to come in can be particularly stressful. This is especially true if the deceased was your spouse and provided income for your family.

In this case, you may want to consider applying for a year’s allowance. This comes out of the estate prior to the inheritance being confirmed. A court will review your case and decide whether or not to award you an allowance. 

If they approve the request then the surviving spouse gets $20,000. An extra $2,000 is added for any children aged 18 and under.

The allowance will only grant funds that match the value of the deceased’s estate. For example, if the estate is only worth $10,000 then the surviving spouse will not receive $20,000. 

If you need to free up capital quickly you might also want to consider selling the property before probate. This means you sell the property because the will is processed. In that case, you need to read up on selling a house before probate

The Bottom Line

Now you know everything about what to expect when inheriting a house.

Thanks to the state’s laws, inheritance tax in NC shouldn’t get in your way. And, unless you’re inheriting nearly $12 million, there’s no estate tax in North Carolina either. So you can really make the most of your inheritance!

If you’ve just inherited a property and are thinking of selling make sure you know what you’re doing. Check out our handy guide on how to avoid cash-for-houses scams. Or get in touch for more information – we’re here to help!

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