North Carolina vs. Florida: Creditor Protection & Taxes


Categories
Tax

Many North Carolinians have winter homes in Florida, and even more Floridians have summer homes in the North Carolina mountains.  For those who live part-time in each state, there may come a time when they want to think about changing domicile from one state to another.  Others may simply be trying to choose between Florida and North Carolina to which to retire or otherwise move.  When it comes to offering protection for one’s assets and less taxation, Florida wins hands down over North Carolina.   However Florida has high property taxes and homeowners’ insurance rates, and there are many quality of life issues to consider.
For a comparison chart of North Carolina and Florida on Creditor Protection and Taxes, click “Continue Reading.”

CREDITOR EXEMPTIONS
(When assets are protected from creditors)
NORTH CAROLINA FLORIDA
HOMESTEAD EXEMPTIONS
N.C. Gen. Stat. § 1C-1601(a) (2009)

Real and Personal Property
a.        A resident debtor(or his dependent) of NC may retain up to $35,000in interest in owner-occupied real property or a burial plot.
b.      An unmarried resident debtor > 65 years of age may retain up to$60,000aggregate interest in such property IF debtor previously owned the real property as a Tenant by the Entirety or a Joint Tenant with Rights of Survivorship AND the former co-owner is deceased.
c.       Resident debtor’s interest in one motor vehicle, not to exceed $3,500.
d.      Resident debtor’s interest in personal, family, or household items such as furniture or clothing, not to exceed $5,000 and $1,000 for each of a maximum of 4 dependents.
e.      Resident debtor’s (or dependent’s) interest in professional books or tools of a trade, not to exceed $2,000.
N.C. Gen. Stat. § 1C-1601(d) (2009)
Exception:
No exemption for tangible personal property purchased by debtor < 90 days preceding initiation of judgment collection or filing for bankruptcy.
Exception to the exception: Property purchase is traceable to the liquidation or conversion of property that may be exempt.
N.C. Const. art. X § 2(2) 
Minor children who survive the decedent real property owner are exempt from paying homestead creditors
N.C. Const. art. X § 2(3) 
Childless spouses who survive the decedent real property owner are exempt from paying homestead creditors.
Exception: surviving spouse owns a separate homestead.
N.C. Const. art. X § 4 
Real and personal separate propertyof married women remains the separate estate of married women and cannot be used to settle debts and obligations of the husband.
Life Insurance
N.C. Gen. Stat. § 1C-1601(a)(6) (2009)
AND
N.C. Const. art. X § 5
Proceeds payable to a beneficiary are protected from creditors of the policy owner both during the insured’s lifetime and upon the insured’s death  as long as the policy is for the sole benefit of the insured’s spouse and/or children. The policy can be structured to be payable to the insured’s estate should the beneficiaries predecease the insured; this will not disqualify it from the Homestead exemption.

Retirement Accounts
N.C. Gen. Stat. § 1C-1601(a)(9) (2009)
The federal Employee Retirement Income Security Act (ERISA) protects 401(k), 403(b), and 457 plans. NC law protects Individual Retirement Accounts (IRAs).
Exceptions: SEP or SIMPLE IRAs, and no retirement account is exempt from Medicaid.
Solutions: For inactive SEP or SIMPLE IRAs, roll over into a regular IRA which will be protected (up to $1 million in bankruptcy).
Retirement Benefits from Another State
N.C. Gen. Stat. § 1C-1601(a)(11) (2009)
Retirement benefits under other state retirement plans IF benefits are exempt under the other state’s laws.
Note of Interest:
There is no case precedent in NC to determine whether inherited IRAs are exempt from creditors.

529 college Savings Plans
N.C. Gen. Stat. § 1C-1601(a)(10) (2009)
Protected up to $25,000 IF only for college or university expenses for a child of the debtor.
Exception: funds placed in the account within the preceding 12 months (unless contributions were made in the ordinary course of debtor’s financial affairs / past pattern of contributions).

Compensation for Personal Injury
N.C. Gen. Stat. § 1C-1601(a)(8) (2009)
Exception: Funds are not exempt from claims for funeral, legal, medical, dental, hospital, and health care charges related to the accident or injury giving rise to the compensation.
Prescribed Health Aids
N.C. Gen. Stat. § 1C-1601(a)(7) (2009)
Debtor’s (or dependent’s) professionally prescribed health aids.
Alimony, Child Support
N.C. Gen. Stat. § 1C-1601(a)(12) (2009)
Payments that have been received or to which the debtor is entitled.

Disclaimed [“renounced”] inheritance
N.C. Gen. Stat. § 31B-3 (2009)
In NC, renouncing an inheritance prior to filing for bankruptcy may protect the inheritance from creditors and assure that it reaches other family members – it’s as if the person with the inheritance interest predeceased the Testator.
a.       Federal Internal Revenue Code (Section 2518) requires renunciation < 9 months after the Testator’s death
b.      Federal Internal Revenue Code (Section 2518) requires that person renouncing has not accepted any benefits or asserted control over the assets of interest.

EXCLUSIONS FROM CREDITOR EXEMPTIONS 
in NC LAW

The aforementioned protections are inapplicable to claims: 
1.        By a governmental (federal or state) entity
2.       Of liens placed on real property by a laborer or mechanic
3.       On real property contract obligations and security interests
4.       Of Statutory liens
5.       For child support, alimony, & distributive award orders
6.       For criminal restitution orders
In addition: Exemptions provided in the Federal bankruptcy code, 11 U.S.C. § 522(d) do not apply to NC residents.

HOMESTEAD EXEMPTIONS
Fla. Const. art. X § 4 

Real and Personal Property
·          Real property is exempt from forced sale.
·          Personal property to the value of $1,000 is exempt from forced sale.
·          The exemption inures to a surviving spouse or heir.
Limits: ½ acre limit within municipal boundaries; 160 contiguous acre limit outside of municipal boundaries.

Life Insurance
Fla. Stat. ch. 222.13 (2009)
1.       Exempt from the insured’s creditors
2.       Inure to the exclusive benefit of the beneficiary
Exception: If policy terms or some other valid assignment provides otherwise.

Cash surrender value and annuities
Fla. Stat. ch. 222.14 (2009)
1.       Cash surrender value of a life insurance policy of a Florida resident
2.       Proceeds of an annuity contract issued to a Florida resident

Retirement Accounts
Fla. Stat. ch. 222.21 (2009)
·          Assets payable from a qualified account (401, 403, 408, 409, 414, 457, 501 plans) are protected for both the participant and the beneficiary.
·          Money received by a pensioner within the 3 months preceding an execution of judgment, attachment, or garnishment is protected.
·          A fund or account does not have to be maintained in a plan covered by the federal Employee Retirement Income Security Act (ERISA) in order to be exempt from creditors’ claims.
·          Neither direct transfers nor rollovers disqualify the retirement funds from protection from creditors.
Exceptions:
1.        Courts have held that inherited IRAs are notexempt from the new owner’s creditors.
2.       A qualifying retirement account is not exemptfrom the claims of a surviving spouse or a qualified domestic relations order. However, payment received by a spouse or ex-spouse isexempt from his/her creditors, except for the Dept. of Revenue.

Medical Savings Accounts and College Savings Plans
Fla. Stat. ch. 222.22 (2009)
Assets in these funds or a plan established under §529 of the federal Internal Revenue Code are protected from creditors.

EXCLUSIONS FROM CREDITOR EXEMPTIONS 
in FL LAW

The aforementioned protections are inapplicable to claims:
1.       For payment of taxes and assessments
2.       Contractual obligations for the purchase, repair, labor provided, or other improvement of the real property


ESTATE TAXES

NORTH CAROLINA FLORIDA
None in 2010, just as at the federal level, but the estate tax will return in 2011 when the federal one does.
a.        2011 Federal exemption will be $1 million with a maximum 55% tax rate for assets exceeding $1M
b.      If 2009 rates are reinstated in 2011, the NC estate tax rate will be a minimum of 6.4% and a maximum of 16.0% for assets exceeding $1M
N.C. Gen. Stat. § 105-32.2(a) (2009)
North Carolina imposes an estate tax on the estate of a decedent when a federal estate tax is imposed and the decedent was either a NC resident at death or a nonresident who owned real or tangible personal property located in NC or intangible personal property (e.g., securities) that has a tax situs in NC.
None. Florida does not impose an estate tax on real property and tangible personal property3.
Note: If a FL resident owns real property in another state, then that state’s estate tax exemption laws will apply to that real property. Although there is no federal estate tax in 2010, many individual states still impose an estate tax. Furthermore, even after the Federal estate tax returns in 2011, state estate tax exemption cut-offs may be for greater or smaller amounts than the federal one.
INCOME TAXES
NORTH CAROLINA FLORIDA
N.C. Gen. Stat. § 105-134.2 (2009)

The minimum rate is 6% and the maximum rate is 7.75%, depending upon one’s income bracket and filing status.

None. However, an individual domiciled in FL but maintain extensive connections (e.g., earning income off of rental property owned in another state) in another state may still be subject to that state’s income tax.
GIFT TAXES
NORTH CAROLINA FLORIDA
None. The gift tax is repealed effective for gifts made on or after January 1, 2009.  None.
GENERATION-SKIPPING TRANSFER TAXES
NORTH CAROLINA FLORIDA
N.C. Gen. Stat. § 105-32.7 (2009)
None in 2010. North Carolina imposes a tax on a generation-skipping transfer in the amount of the credit allowable against the federal GST tax. The tax applies when the transferor is either an NC resident at the time of the original transfer or the transferor is not an NC resident at the time of the transfer, but the transfer includes either real or tangible personal property located in NC or intangible personal property (e.g., securities) that has a tax situs in NC. This tax is due on the same date as the federal return.
None.
INTANGIBLE TAXES
NORTH CAROLINA FLORIDA
None.  None. 

Both North Carolina and Florida have sales taxes.
Endnotes:
1.       1. Real property owned by a husband and wife is protected from creditors of one spouse but not from joint creditors.  Exception:  Protection may be limited when the Internal Revenue Service is the creditor.
2.       2. Separate property is defined in the NC General Statutes as all real and personal property acquired by a spouse before marriage or acquired by a spouse by bequest, devise, descent, or gift during the course of the marriage.  N.C. Gen. Stat. § 50-20(b)(2) (2009).
3.       3. Real property (land, real estate) and tangible personal property are subject to estate tax in the state in which they are located.  Intangible property is subject to estate tax in the state where the decedent is domiciled (residing within that state and with an intention to make that state his or her permanent residence).
4.       4. Source:  David Pratt and Lisa Stern, Tax and Asset Protection Benefits Afforded Florida Domiciliaries, Fla. B. J. 32, 27 (Feb. 2010).

TrustCounsel
Address: 1414 Raleigh Rd Ste 203, Chapel Hill NC 27517
Phone: 919.636.0950 | Toll Free: 800.201.0413 | Fax: 919.493.6355
ghgiddens@trustcounselpa.com | www.trustcounselpa.com