Estate Plans in North Carolina: Your Guide to Tax Planning

Taxes are one of life’s certainties. Tax considerations are an important part of retirement planning and estate planning. At Arnold & Smith, PLLC, our estate planning team is highly adept in financial and tax planning. We want to make sure that you have the tools, information, and resources you need to protect your financial interests. Here, our Charlotte estate planning attorneys provide a guide to tax planning in North Carolina.

For most people and families in North Carolina, the most effective tax planning strategy is to make full use of qualified retirement accounts. As succinctly defined by Investopedia, a qualified retirement plan is one that satisfies certain IRS requirements and offers tax benefits. You may be able to obtain tax benefits by using:

• Traditional IRA: A traditional individual retirement account (IRA) to deposit pre-tax income and invest it on a tax-deferred basis. No capital gains taxes or divided taxes will be assessed until withdrawals are made.
• Roth IRA: Contributions to a Roth individual retirement account (IRA) are made with post-tax dollars. Although deposits to a Roth IRA do not reduce a tax bill in a particular year, future withdrawals are tax-free.
• 401(k): Sponsored by an employer, a 401(k) plan allows employees to make automatic contributions out of their paycheck. Beyond offering tax advantages, a 401(k) often includes an employer match. You should always take advantage of an employer match to the maximum extent possible. If you do not take advantage of an employer matching program, you are essentially leaving money on the table.

For 2021, the maximum annual contribution to your IRA(s) is $6,000 if you are under 50 and $7,000 if you are over 50. The maximum contribution covers both your traditional IRA and Roth IRA together—meaning you can contribute up to $6,000 per year (if under 50) to both accounts combined. You can put all $6,000 in a traditional IRA, all $6,000 in a Roth IRA, or split it between the two in any manner you see fit. If you are thinking about reducing your long-term tax liability, maximizing out your retirement account contributions is highly recommended.

Estate Planning Tip: The funds remaining within a qualified retirement plan can avoid the probate process. As long as your beneficiary designations are fully up to date, any assets remaining in an IRA, Roth IRA, or 401(k) can pass directly to the named individuals. They do not have to go through North Carolina’s probate procedures.

As explained by the AARP, 17 U.S. states have a state-levied estate tax and/or inheritance tax. North Carolina is not one of these states. The only estate tax that you have to consider is the federal estate tax. The Internal Revenue Service (IRS) describes the estate tax as a “a tax on your right to transfer property at your death.” While many people are concerned about estate/inheritance taxes, there is a significant exemption. As of 2021, the first $11.7 million of your estate is not subject to federal estate taxes. Though, the estate tax exemption may decrease in the coming years. For families facing potential estate tax exposure, there are several tax planning strategies available, including:

• Portability (transfer of estate tax exemption to a spouse);
• Making qualified expenditures, including medical or educational expenses;
• Early gifting to preserve full estate tax exemption;
• Set up a qualifying trust, such as a irrevocable life insurance trust;

What estate planning strategy works best for you and your family depends on many different factors. If you have any questions or concerns about estate taxes or estate tax planning in North Carolina, please do not hesitate to reach out to our Charlotte asset protection lawyer for guidance and support. With deep experience and expertise in tax planning, we will help you and your family minimize your tax liability.

At Arnold & Smith, PLLC, our Charlotte estate planning lawyers are ready to take action to protect your rights and your financial interests. If you have questions or concerns about taxes and your estate plan, we are available to help. Contact our firm today for a fully confidential review and evaluation of your case. We represent people and families throughout North Carolina, including in Mecklenburg County, Gaston County, Union County, Stanly County, and Anson County.