The Economic Growth and Tax Relief Reconciliation Act of 2001 (Tax Act of 2001) made significant changes to federal transfer taxes. After 2009, federal estate and generation skipping transfer taxes are repealed. However, the Tax Act of 2001 contains a sunset provision that will reinstate the law as it existed when President Bush signed the bill on June 7, 2001. Unless Congress takes action to keep this new legislation, it disappears at midnight on December 31, 2010, making estate tax planning (not to mention writing this publication) very difficult. Consequently, both the new and the old laws are described in this publication.
The federal government taxes the transfer of property between individuals. All property is subject to transfer taxes, including real estate, bank accounts, jewelry, cars, cash, stocks and bonds. If you give away property during your lifetime, you may be liable for gift tax. If you transfer property at your death, your estate may be liable for estate tax. Gift and estate taxes are called transfer taxes because the tax is on the transfer of property.
Transfers of property, either during your lifetime or at death, are taxed under a single scheme of taxation -- the unified estate and gift tax. A single tax rate schedule applies to both gift and estate taxes. Until 2002, a single credit also applies to both taxes. The rules are interrelated, so that gift tax liability incurred during your lifetime may affect your estate tax liability. After 2001, the lifetime amount exempted from gift taxes increases to $1,000,000 and does not increase thereafter. Unlike the estate tax, the gift tax was not repealed by the Tax Act of 2001.
The applicable credit amount exempts a certain amount of your property from gift and estate taxes. If you make large gifts during your lifetime, you may use the applicable credit amount to avoid owing gift tax. To the extent you use the credit during your lifetime, it will not be available to your estate at your death. Ask your lawyer for advice before making large gifts.
Under the Tax Act of 2001, the exemption amount increases until the estate tax is repealed in 2010. Below is the list showing the amount of property sheltered by the applicable credit amount for the years between 2001 and 2010.
Under the old law, the amount of property that would have been sheltered by the applicable credit amount increased to $1,000,000 by the year 2006. Below is the list showing the amount of property that would have been sheltered by the applicable credit amount for the years between 1997 and 2006. Unless Congress takes action to keep the provisions of the Tax Act of 2001, the amount exempted from federal estate tax in the year 2011 and thereafter will be $1,000,000.
Transfers of property between spouses are generally not subject to federal gift or estate tax. The marital deduction allows you to transfer an unlimited amount of property to your spouse during your lifetime or at your death free of transfer taxes.
Certain transfers between spouses, however, may not qualify for the marital deduction. For example, if you give your spouse the right to use and possess the property for his or her lifetime, with the property going to your children at your spouse's death, this transfer does not qualify for the marital deduction. Some temporary interests may qualify for the marital deduction if properly designed.
If a transfer of property is subject to tax, the tax is figured using the unified rate schedule. It applies to both gift and estate taxes. The rate of tax is based on cumulative (total) transfers. Thus, the amount of property you transferred in the past may push your current transfers and transfers at death into a higher tax bracket.
The tax rates are graduated, with lower tax rates applying to small amounts of property transferred and higher rates applying to larger amounts transferred. Until 2002, the benefits of the graduated rates are phased out beginning with cumulative transfers exceeding $10,000,000. For the years before 2002, you may figure your potential gift or estate tax using the rate schedule listed in the table below. Beginning in 2002, the estate tax rates in excess of 50% are repealed. The Tax Act of 2001 also repeals the 5 percent surtax that phased out the benefits of the graduated rates for taxable transfers valued at more than $10,000,000.
After 2001, the highest rate of tax for federal gift, estate, and generation skipping transfer taxes will be phased down, with the latter two taxes ultimately repealed in 2010. The list below shows the phase out schedule for the highest rate of tax imposed on taxable transfers.
| Table applies to tax years before 2002 | |||
| Taxable transfer on more than -- | But not more than -- | Tax on amount in Column 1 | Rate of tax on excess of
amount in Column 1. |
| Column 1 | Column 2 | Column 3 | Column 4 |
| $ 0 | $10,000 | ----- | 18% |
| $10,000 | $20,000 | $1,800 | 20% |
| $20,000 | $40,000 | $3,800 | 22% |
| $40,000 | $60,000 | $8,200 | 24% |
| $60,000 | $80,000 | $13,000 | 26% |
| $80,000 | $100,000 | $18,200 | 28% |
| $100,000 | $150,000 | $23,800 | 30% |
| $150,000 | $250,000 | $38,000 | 32% |
| $250,000 | $500,000 | $70,800 | 34% |
| $500,000 | $750,000 | $155,800 | 37% |
| $750,000 | $1,000,000 | $248,300 | 39% |
| $1,000,000 | $1,250,000 | $345,800 | 41% |
| $1,250,000 | $1,500,000 | $448,300 | 43% |
| $1,500,000 | $2,000,000 | $555,800 | 45% |
| $2,000,000 | $2,500,000 | $780,000 | 49% |
| $2,500,000 | $3,000,000 | $1,025,800 | 53% |
| $3,000,000 | ----- | $1,290,800 | 55% |
Federal gift tax
The federal gift tax is a tax on transfers of property made as gifts. The Tax Act of 2001 does not repeal the federal gift tax. In 2002, the lifetime exemption will increase from $675,000 to $1,000,000, and it will not be increased thereafter. After 2009, the highest rate of gift tax will be the top individual income tax rate.
A gift is a lifetime transfer of property from one person (the donor) to another (the donee) where the donor does not receive anything of equivalent value in return. A gift must fulfil three requirements. First, the donor must intend to make a gift. Second, the donor must deliver the gift. Third, the donee must accept the gift.
Before gift tax may be imposed, the gift must be completed. A promise to make a gift is not enough. The gift must be delivered and accepted. The donor must give up all control over the property. If he has the right to give the property to someone else or to take the property back, the gift is not completed.
Generally, the value of the gift is its fair market value on the date of the gift. The value of the gift may be less than fair market value to the extent that the donee gives the donor something in return. For example, Father sells Son the house for $1. If the fair market value of the house is $100,000, Father has made a gift to Son valued at $99,999.
Small gifts are not subject to gift tax. Each taxpayer may give $10,000 per year per donee without incurring federal gift tax liability. This amount is called the annual exclusion. The federal annual exclusion will be increased according to inflation in $1,000 increments.
If the donee will receive the benefits of the gift in the future, it is a gift of future interest, and the annual exclusion does not apply. For example, Mother transfers property valued at $10,000 to a trust for the benefit of Son. The trust is irrevocable. The gift is completed because Mother cannot change the terms of the trust. Son will receive one-half of the property placed in the trust when he reaches the age of 21 and the other half when he reaches the age of 35. Because Son does not receive the benefits of the gift until some time in the future, it is a gift of future interest. The annual exclusion does not apply, and the gift may be subject to gift tax.
Note: Some gifts to minor children may qualify for the annual exclusion even though the minor children will receive the benefits some time in the future. The gifts must be properly structured. Ask your attorney for more information.
A husband and wife may choose to split gifts. Each spouse is considered to give one half of the gift, regardless of which spouse owned the property. Thus, a husband and wife may double the annual exclusion to $20,000 per year per donee.
The donor files a gift tax return to report gifts of present and future interests. Gift tax returns should be filed and any gift tax due each year. Generally, the gift tax return is due by April 15. Donors do not need to file a gift tax return:
- When gifts of a present interest to any donee are valued at $10,000 or less for the year. Note: Spouses who split gifts must file a gift tax return. If the split gift is $20,000 or less, they may file a short form gift tax return.
- When qualified transfers are made directly to educational organizations for tuition and to health care providers for medical services.
- When transfers are made to a spouse that qualify for the marital deduction.
If the gift tax is not paid when due, interest and penalties may be assessed. Interest on the unpaid amount is compounded daily. Failure to file a return is also subject to penalties. If you willfully fail to file a required gift tax return or to pay gift tax due, you may be subject to criminal penalties, including fines and imprisonment.
Federal estate tax
The federal estate tax is a tax on the transfer of property at death. The federal estate tax is repealed after 2009. However, unless Congress takes action to keep the provisions of the Tax Act of 2001, the federal estate tax will be reinstated in 2011.
The estate tax is computed using the following formula.
- Determine the value of the gross estate.
- Subtract allowable deductions.
- Add the value of taxable gifts made after 1976 if not already included in the gross estate. (Remember that the estate and gift tax rate is based on cumulative transfers. The gift tax paid on taxable gifts made after 1976 is subtracted in Step 5.)
- Apply the unified estate and gift tax rates. See the unified rate schedule for the applicable rate of tax.
- Subtract the amount of gift taxes paid on taxable gifts made after 1976.
- Subtract the allowable applicable credit amount and other allowable credits. The resulting amount is the net federal estate tax owed by the estate.
The gross estate is the total value of all interests in property owned by the decedent at his death. It also may include the value of some property transferred during his life. For a complete discussion of the property interests that may be included in your gross estate, ask your attorney. See the section, Valuing Your Gross Estate.
The federal estate tax return is due within nine months after the date of the decedent's death. Generally, the decedent's representative must file an estate tax return if the value of the gross estate exceeds $675,000 (for 2001). However, if the applicable credit amount was used to offset lifetime gifts, this amount would be less.
If the tax is not paid when due, interest and penalties may be assessed against the estate. Interest on the unpaid tax is compounded daily. Penalties that may be imposed against the estate include penalties for late filing and late payment, penalties for undervaluing the estate property, and penalties for fraud. Criminal penalties that may be assessed include fines and imprisonment.
Generation skipping transfer tax
The generation skipping transfer (GST) tax is a tax in addition to the federal estate and gift taxes. To discourage families from postponing estate taxes by tying up property in trust for several generations, Congress created the generation skipping transfer (GST) tax. The federal generation skipping transfer tax is repealed after 2009. However, unless Congress takes action to keep the provisions of the Tax Act of 2001, the generation skipping transfer tax will be reinstated in 2011.
This tax adds another layer of complexity to planning large estates. Generally, the GST tax applies to situations where the estate tax may skip a generation. Some examples may help explain this complicated tax.
Example 1. Grandfather sets up a trust to benefit Son, remainder to Grandchild at Son's death. If the trust is set up so the value of the trust is not included in the Son's gross estate, the GST tax may apply. This is known as a taxable termination.
Example 2. Grandfather sets up a trust and directs the income and principal to be distributed to Son or Grandchild. This is known as a taxable distribution, and the GST tax may apply.
Example 3. Grandfather gives Grandchild property outright while Son is still alive. This is known as a direct skip, and the GST tax may apply.
The GST tax is calculated using a complex formula based on a flat rate of 55 percent (the highest percentage of estate tax currently in effect). This tax is in addition to gift and estate taxes. If a transfer is subject to both the GST tax and the estate or gift tax, the highest combined rate of tax may be 110 percent (in 2001). For large amounts of property transferred, it is possible that the total tax owed may be greater than the value of the property. After 2001, the highest rate of tax will be phased down until the tax is repealed in 2010. See the discussion above for more information.
Exemptions and exclusions provide some relief from the GST tax.
- The lifetime exemption permits generation skipping transfers of up to a total of $1,060,000 (in 2001) free of GST tax.
- A generation skipping transfer which qualifies for the annual exclusion ($10,000 per year per person) is free of the GST tax (except for certain transfers to trusts).
- Qualifying payments made directly to the providers of medical care or educational services are free of GST tax.
The exclusions and exemptions make discussion of the GST tax academic for most people. People with large estates, however, need professional advice to minimize the impact of the GST tax.
Note: Under the Tax Act of 2001, the federal generation skipping transfer tax is repealed after 2009. Until 2004, the amount of transfers exempt from the generation skipping transfer tax will be $1,060,000 adjusted for inflation. For years beginning after 2003, the amount exempt from generation skipping tax is the same as the amount exempt from the estate tax.
Note: The rules discussed in this publication apply to U.S. citizens. Some of the rules are different for non-U.S. citizens. If you are a non-U.S. citizen, check with an attorney or an accountant for more information.
North Carolina gift tax
The state of North Carolina levies a gift tax on property given to another individual during life.
Gifts valued at $10,000 or less are not taxed. This annual exclusion does not apply to gifts that do not take effect until the future, unless the gift is made to someone under 21 years old and certain conditions are met. A spouse may use the other spouse's annual exclusion to make a gift valued at up to $20,000 in one year to one person. Both spouses must be residents of North Carolina.
In addition to being able to give $10,000 per year per recipient free of gift tax, donors have a lifetime exemption of $100,000, which shelters gifts made to certain close relatives, such as children or parents. This exemption can be used entirely in one year or stretched over the lifetime of the donor. In years when individual gifts exceed $10,000, the excess can be applied against the $100,000 exemption until it is used up. This exemption can be claimed by a donor only if the donee is a direct descendant, ancestor, adopted child or stepchild of the donor.
North Carolina does not impose a gift tax on gifts made to:
- a spouse;
- charitable, educational, or religious organizations located within North Carolina, or located in another state if that state does not tax its residents for gifts made to such organizations located in North Carolina; or
- the state of North Carolina or to counties or municipalities within North Carolina.
North Carolina gift tax also does not apply to:
- tuition payments made on behalf of an individual to an educational institution or to medical payments made on behalf of an individual to a provider of medical care;
- property transferred to a spouse that qualifies under federal law as terminal interest property; and
- Qualified Tuition Programs.
The N.C. gift tax rates are set out in Table 1. Higher tax rates apply to gifts made to Class B or C beneficiaries, who are more distant relations or non-family members. Gifts sheltered by the annual exclusion of $10,000 or the lifetime exemption of $100,000 are not taxable gifts.
| Table 1. N.C. Gift Tax Rates for Class A Beneficiaries* | |
| If the taxable gift is: | The tax rate is: |
| Not over $10,000 | 1% |
| Over $10,000 but not over $25,000 | $100 plus 2% of amount over $10,000 |
| Over $25,000 but not over $50,000 | $400 plus 3% of amount over $25,000 |
| Over $50,000 but not over $100,000 | $1,150 plus 4% of amount over $50,000 |
| Over $100,000 but not over $200,000 | $3,150 plus 5% of amount over $100,000 |
| Over $200,000 but not over $500,000 | $8,150 plus 6% of amount over $200,000 |
| Over $500,000 but not over $1,000,000 | $26,150 plus 7% of amount over $500,000 |
| Over $1,000,000 but not over $1,500,000 | $61,150 plus 8% of amount over $1,000,000 |
| Over $1,500,000 but not over $2,000,000 | $101,150 plus 9% of amount over $1,500,000 |
| Over $2,000,000 but not over $2,500,000 | $146,150 plus 10% of amount over $2,000,000 |
| Over $2,500,000 but not over $3,000,000 | $196,150 plus 11% of amount over $2,500,000 |
| Over $3,000,000 | $251,150 plus 12% of amount over $3,000,000 |
| *Class A beneficiaries are the donor's parents, children or grandchildren, adopted children, and in certain cases, sons- and daughters-in-law. | |
| Gifts made to Class B beneficiaries (brothers, sisters, descendants of brothers and sisters, or uncle or aunts by blood) are taxed at a rate ranging from 4% to 16%. | |
| Gifts made to C beneficiaries (all others) are taxed at a rate ranging from 8% to 17%. | |
You must prepare a state gift tax return for any calendar year in which gifts of over $10,000 are made to an individual donee. This return is to be filed and tax paid, if due, by April 15 following the calendar year in which the gift was made.
North Carolina estate tax
North Carolina imposes an estate tax on the estate of a decedent in an amount equal to the federal state death tax credit. The tax is payable from the assets of the estate. A person who receives property from an estate is liable for the amount of estate tax attributable to that property.
The personal representative of an estate is liable for an estate tax that is not paid within two years after it was due. This liability is limited to the value of the assets of the estate that were under the control of the personal representative. The personal representative may sell assets in the estate to obtain money to pay the estate tax.
The estate tax is due when an estate tax return is due. An estate tax return is due on the date a federal estate tax return is due. An estate tax return must be filed if a federal estate tax return is required.
Note: Under the Tax Act of 2001, the state death tax credit is phased out from 2002 to 2004. After 2004, the state death tax credit is repealed.
North Carolina generation-skipping transfer tax
North Carolina imposes a generation skipping transfer tax when such a tax is imposed under federal law if any of the following apply:
- The donor is a resident of North Carolina at the time of the original gift.
- The donor is not a resident of North Carolina at the time of the original gift and the gift includes any of the following:
- Real or tangible personal property that is located in North Carolina.
- Intangible personal property that has a tax situs in North Carolina.
The amount of tax is the maximum credit for state generation-skipping transfer taxes allowed under federal tax law.
Note: Under the Tax Act of 2001, the federal generation skipping transfer tax is repealed after 2009.
Notes: The federal annual exclusion will be increased according to inflation in $1,000 increments. Return to text.
References from the Internal Revenue Code:
Section 529. Qualified state tuition programs.
Section 2001. Imposition and rate of tax.
Section 2010. Unified credit against estate tax.
Section 2011. Credit for state death taxes.
Section 2012. Credit for gift tax.
Section 2031. Definition of gross estate.
Section 2032a. Valuation of certain farm, etc., real property.
Section 2035. Adjustments for certain gifts made within 3 years of decedent's death.
Section 2039. Annuities.
Section 2055. Transfers for public, charitable, and religious uses.
Section 2056. Bequests, etc., to surviving spouse.
Section 2057. Family-owned business interests.
Section 2101. Tax imposed.
Section 2102. Credits against tax.
Section 2106. Taxable estate.
Section 2501. Imposition of tax.
Section 2502. Rate of tax.
Section 2503. Taxable gifts.
Section 2505. Unified credit against gift tax.
Section 2513. Gift by husband or wife to third party.
Section 2522. Charitable and similar gifts.
Section 2523. Gift to spouse.
Section 2524. Extent of deductions.
Section 2601. Tax imposed.
Section 2632. Special rules for allocation of gst exemption.
Section 2603. Liability for tax.
Section 2604. Credit for certain state taxes.
Section 2662. Return requirements.
Section 6018. Estate tax returns.
Section 6019. Gift tax returns.
Section 6075. Time for filing estate and gift tax returns.
Section 6166. Extension of time for payment of estate tax where estate consists largely of interest in closely held business.
Section 6324. Special liens for estate and gift taxes.
Section 6651. Failure to file tax return or to pay tax.
Section 7203. Willful failure to file return, supply information, or pay tax.
Section 7520. Valuation tables.References from the North Carolina General Statutes:
105-32.2. Estate tax imposed in amount equal to federal state death tax credit.
105-32.3. Liability for estate tax.
105-32.4. Payment of estate tax.
105-32.5. Making installment payments of tax due when federal estate tax is payable in installments.
105-32.6. Estate tax is a lien on real property in the estate.
105-32.7. Generation-skipping transfer tax.
105-32.8. Federal determination that changes the amount of tax payable to the State.
105-188. Gift taxes; classification of beneficiaries; exemptions; rates of tax.
105-189. Transfer for less than adequate and full consideration.
105-190. Gifts made in property.
105-193. Lien for tax; collection of tax.
105-194. Death of donor within three years; time of assessment.
105-195. Tax to be assessed upon actual value of property; manner of determining value of annuities, life estates, and interests less than absolute interest.
105-197. When return required; due date of tax and return.
105-197.1. Federal corrections.
Prepared by Carol A. Schwab, J.D., LL.M., Professor and Extension Specialist, NC State University.
This publication is provided as a public service and is designed to acquaint you with certain legal issues and concerns. It is not designed as a substitute for legal advice, nor does it tell you everything you may need to know about this subject. Future changes in the law cannot be predicted, and statements in this publication are based solely on federal law and on the laws of North Carolina in force on the date of publication.
Date: October 2001
| NC State
University College of Agriculture and Life Sciences North Carolina Cooperative Extension Service Department of Family and Consumer Sciences |
North Carolina Bar
Association Elder Law Section |
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