- Capital gains tax. In addition to some probate assets, capital gains tax is commonly applied to beneficiaries of some old trusts. A few decades ago trusts were primarily used as a means of minimizing federal estate taxes. However, the federal estate tax exemption has changed over time. While trusts continue to help reduce an estate tax burden, the tax is no longer a prime concern. Trusts with old terms may expose beneficiaries to capital gains tax. Bypass trusts and credit shelter trusts are examples of a few trusts that do not provide for a step-up in basis upon the surviving spouse’s death and, thus, may result in higher capital gains tax being imposed upon transfer to beneficiaries following the surviving spouse’s death.
- Net investment income tax. When an individual inherits rental property, income accrued from rental property may be subject to the Net Investment Income Tax (NIIT). NIIT also applies to nonqualified annuities, some business interests, capital gains, and interest and dividends. It may apply to estates and trusts. Learn about managing NIIT. Lawmakers are currently considering proposals that would eliminate NIIT, but the status is pending.
- Income tax. Withdrawals from inherited retirement accounts often have income tax implications. If Required Minimum Distributions are not managed and paid timely, penalties in addition to income tax will incur. Learn more about federal and state tax issues with inherited IRAs.
- Estate tax or inheritance tax. Even though North Carolina does not currently impose an estate or inheritance tax, if the decedent bequeathed out-of-state assets to surviving family, taxes in the alternate jurisdiction might apply. Federal estate tax could apply as well.
- Unique assets. Art, firearms, historic memorabilia, and other collectibles may be subject to certain taxes. Depending how the decedent structured assets in their estate plan and the assets’ values, artwork may require updated appraisals to help determine date-of-death values. Additionally, the Internal Revenue Service may request an art audit, which is commonly a lengthy process. If an error in valuation is found, penalties for underpaid tax would apply.
In some circumstances, it may be in the heir’s best interest to disclaim the inheritance. Disclaiming inheritances in North Carolina requires meeting strict deadlines. When handled timely and properly, the process can help the heir to avoid gift taxes, remain eligible for benefits like Medicaid, among other advantages.