Donor-Advised funds are a tax-advantaged way to make gifts to charities over time. A donor-advised fund is basically an account with a public charity which has a donor-advised program and which qualifies as a “sponsoring organization.” Gifts are made to the fund, which is held in the name of the donor or in the name or names of the donor’s family members. Gifts from donors to the fund qualify as charitable deductions for income tax purposes, and distributions are made from the fund to charitable organizations over time. Distributions from the fund do not count as additional charitable deductions for the donor, since the donor has already gotten a charitable deduction when the original gift was made to the fund.
Donor-advised funds are usually opened during the lifetimes of the donors, and distributions are made to charitable organizations which the donors select. Since the sponsoring organization is responsible for seeing that the tax laws have been complied with, the donors make “recommendations,” and not binding directives, as to the distributions to tax-exempt organizations. Normally those requests are honored unless the requested done does not qualify as a tax-exempt organization. Donor-advised funds may also be created, or increased at death under a will or trust agreement of the donor, often with family members of the donor to make distribution recommendations to the charitable organization after the deaths of the donors.
Donor-advised funds may be used to support a number of public charities. They are sometimes used as alternatives to private foundations.
Private foundations are separate legal entities created by a donor or donors. They require ongoing maintenance and expense. Also, the donors receive smaller tax benefits than they would receive with a similar gift to a donor-advised fund at a public charity. Legally, a private foundation allows the donor or donors to retain more control over the investments, grants, and control of the entity.
Donors often prefer a donor-advised fund instead of a private foundation for convenience, reduced costs, greater tax benefits and ease of gifting, with no worries about minimum distributions or the tax issue of excise tax on net investment income, which would be applicable to a private foundation.
The donors may make a large charitable gift to the donor-advised fund, and have the gift used to make periodic distributions over time, with the donors not having to worry about compliance costs and requirements.
“Bunching” of Charitable Deductions
Under the new tax laws with higher standard deductions, donors who traditionally have made charitable gifts of several thousand dollars a year in deductible contributions now often receive reduced or no tax benefits from making their customary annual distributions.
For example, consider married donors with $120,000 annual income, who traditionally give about $5,000 per year to charitable organizations. On their tax returns, they cannot claim medical deductions of less than 10% in 2019 (formerly 7.5% in 2017 and 2018), so often the
taxpayers would not itemize medical deductions. They cannot deduct more than $10,000 per year in state and local taxes, and there is no longer a deduction for miscellaneous itemized deductions. Unless they have high home mortgage interest, if they donate $5,000 to charitable organizations in 2019, their total deductions may be less than their standard deduction of $24,400 (in 2019), in which case they would receive no income tax benefit for charitable gifts totaling $5,000.
In the alternative, let’s consider “bunching” their contributions by the use of a donor-advised fund. For example, they could give $50,000 to a donor-advised fund in 2019. If their itemized deductions otherwise would be $10,000 in state and local taxes and $5,000 in home mortgage interest, the gift to the donor-advised fund itemized tax deductions would now total $65,000 ($50,000 gift to the donor-advised fund, plus $10,000 in state and local taxes and $5,000 in mortgage interest), as compared to a standard deduction of $24,400. Their income taxes for 2019 would be reduced by over $10,000, assuming they were in a 28% marginal tax bracket.
The donor-advised fund would receive $50,000 in gifts, but it would be possible to distribute from the fund only the donors’ customary $5,000 to charitable organizations, as requested by the donors. The charities would receive their customary gifts in 2019 and the donor-advised fund would retain the remaining $45,000. In future years similar gifts could be made from the donor-advised fund each year, as directed by the donors or their family.
The donors could resume claiming a standard deduction on their subsequent income tax returns, until the fund was depleted. If the donors died or became incapacitated, their families could continue to make charitable contributions from the fund.
The above example illustrates moderate gifting and the effect of “bunching,” but donor-advised funds are often utilized for very large gifts, often at the death of a donor, sometimes in lieu of a private foundation.
Families With Existing Private Foundations
If the donors already have a private foundation which they find expensive and burdensome to maintain, the private foundation could distribute its assets to a donor-advised fund with a sponsoring organization. The sponsoring organization would then be responsible for compliance with federal laws, instead of the donors or their family’s being responsible.
Another possible benefit would be to bring one’s children into the gifting process during the donors’ lifetimes. After the donors’ deaths, the children would continue to make recommendations for charitable gifts from the donor-advised fund.
Most sponsoring organizations allow grantors or designated family members as advisors for charitable gifts for at least one generation, and some allow two generations.
Most community foundations have donor-advised fund programs and sometimes other organizations such as colleges and universities maintain similar funds, where a certain percentage of contributions must go to the sponsoring organization itself, such as 50%, and the remainder can go to other charitable organizations.
A donor who wishes to establish an ongoing philanthropic program – for themselves and/or their families – should consider establishing a donor-advised foundation as part of their ongoing gifting, and possibly establishing the habit of ongoing gifting to charities for their families.
In Winston-Salem, the Winston-Salem Foundation, Suite 200, 751 West Fourth Street, Winston-Salem, NC 27102, (336) 725-2381, can be contacted about the establishment of a donor-advised fund. See https://www.wsfoundation.org/contact.
Several larger cities and counties in North Carolina have large community foundations, similar to The Winston-Salem Foundation. The North Carolina Community Foundation is a single statewide community foundation with a network of affiliate foundations across the state, which serve many rural and less-populated counties, and which can serve as a sponsoring organization for donor-advised funds in their communities. A list of affiliated community foundations funds can be found at nccommunityfoundation.org/communities.
It is very easy to set up a donor-advised fund with a sponsoring organization. Just contact the organization and see whether it is a sponsoring organization for donor-advised funds. If so, they will meet with you and draft a letter whereby the organization agrees to be the sponsoring organization for your donor-advised fund, which describes the purposes for your fund, etc. They will make it easy for you.
Many employers offer benefits to their workers as part of their total compensation package. These employee benefits can take the form of disability insurance and retirement plans, including 401(k) plans and pensions. These benefits are often governed by ERISA, the Employee Retirement Income Security Act of 1974.
ERISA is intended to protect the interest of employees who are enrolled in employee benefit plans to make sure they receive the benefits they were promised. If you are an employee and have been denied benefits from an employer-sponsored plan, you may have a claim. It is important that you get timely legal advice about how to assert and preserve your claim to receive these benefits. If you file a hasty or incomplete appeal, you can lose your rights. Many pitfalls can trap the unsuspecting claimant and lead to the denial of legitimate benefits.
In most cases, if an ERISA claim is denied, an employee must follow the procedure for administrative appeals set out by the insurer or plan sponsor. Only those issues raised during administrative appeal are typically preserved. For example, if you are appealing the denial of disability benefits, you should submit your medical records that show you are disabled and opinions from your doctors that support your claim. You must also raise all issues underlying your claim for benefits. If you do not resolve your claim with the company, a court will consider only the issues you raised in the administrative process and the records contained in the administrative appeals. Getting advice early can help preserve important rights.
ERISA is a specialized area of law that not all lawyers practice. If you have an ERISA claim, you should find an attorney with experience in this field. We would be happy to meet with you to help you to better understand your options and to pursue your claim.
ERISA claims are typically filed in Federal Court. A judge will hold a bench trial or hearing based on the paperwork you presented in the administrative record. There is no jury trial. ERISA claimants cannot recover claims for emotional distress or punitive damages. In some cases, however, a court may award attorney’s’ fees to the claimant. The court can award only past benefits that have accrued, and cannot award benefits for future expenses.
In 2019, 6,619 ERISA cases were filed, down from a peak of 8,938 in 2010, according to a report that analyzed court filings uploaded to the federal Public Access to Court Electronic Records, or PACER, database. Last year, 3,797 workers sued over benefit claim denials, according to the report. In 2010, 3,118 people filed these suits. The overall amount of damages awarded in ERISA suits has also remained relatively consistent, though the number of cases in which damages are awarded has fallen. Last year, 740 cases resulted in damages awards (roughly 20 percent of claims), resulting in a total of $280 million being awarded. In 2017, $343 million went to claimants in 806 cases, and in 2016, $232 million went to 843.
The SECURE Act (acronym for Setting Every Community Up for Retirement) was enacted on December 20, 2019. It is intended to encourage Americans to save for their futures and to incentivize businesses to make retirement saving opportunities more accessible to their employees. The bill makes some substantial changes to retirement plan legislation which will affect both individual and business taxpayers.
Here are some of the significant provisions:
The age at which required minimum distributions (RMD’s) must begin went from 70 ½ to 72. Note that if a taxpayer was 70 ½ in 2019, RMD’s must be withdrawn for 2019 and 2020 even if he or she won’t be 72 until 2021.
Previously, an individual aged 70 ½ or older on December 31st could not make contributions to a traditional IRA. This restriction no longer applies. (There was and continues to be no age restriction for Roth IRA contributions.)
Taxpayers may withdraw up to $5,000 from a defined contribution plan or IRA as a “qualified birth or adoption” distribution without incurring a penalty. The distribution is still subject to income tax. The distribution must be made during the one-year period beginning the day the child is born or the day the adoption is finalized.
Tax-free 529 Plan distributions of up to $10,000 (lifetime limit) may be made for certain apprenticeship programs and student loan payments. However, taxpayers may not deduct interest paid on a qualified education loan to the extent the interest was from a tax-free distribution.
Employer-sponsored retirement plans may provide arrangements whereby participants may borrow from their accounts under various arrangements. Beginning December 20, 2019, loans which an employee can access by using a credit card are prohibited. Accordingly, such loans will now be treated as taxable distributions.
Taxpayers may not contribute more than their taxable compensation to an IRA. Previously, stipends and non-tuition fellowship payments to graduate and postdoctoral students were not treated as compensation. For tax years beginning after December 31, 2019, these payments are treated as compensation for purposes of calculating allowable IRA contributions.
Benefits of the “stretch IRA” – long an estate planning tool – have been severely curtailed. Previously, those who inherited IRA’s and defined-contribution plans could withdraw distributions (and pay tax on the withdrawals) based on their life expectancies. Beginning in 2020, beneficiaries will have 10 years to spend down these amounts. The five exceptions to this change are when the beneficiary is –
the surviving spouse,
a minor child of the deceased,
a disabled person,
a chronically ill individual, or
a person not more than 10 years younger than the owner.
Once minors reach the age of majority, the 10-year rule applies. Defined benefit plans do not fall under the new rule.
Before the SECURE Act, small business employers were allowed an annual tax credit for three years equal to 50% of the costs – up to a maximum of $500 – of starting and administrating a plan. Beginning in tax years starting after 2019, the $500 maximum has been increased to the greater of –
the lesser of $250 times the number of non-highly compensated eligible employees, or $$5,000; or,
An additional credit of $500 per year is granted to small business employers that adopt automatic enrollment provisions.
Previously, automatic enrollment arrangements could not exceed 10% of employees’ pay. Starting in 2020, the 10% limit still applies for the first year, but goes to 15% thereafter.
Before 2020, retirement plans had to be adopted as of the end of the employer’s tax year. For business tax years beginning after 2019 employers have until the due date (including valid extensions) of the tax return for the year to adopt a plan.
Previously, employers could exclude from their defined contribution plans any employees who worked less than 1,000 hours per year. Under the new law, 401(k) plans must allow employees who are at least 21 years old and have worked 500 hours per year with the employer for at least three consecutive years to make elective deferrals. The three-year time window cannot include 12-month periods beginning before 2021.
Multiple Employer Defined Contribution Plans (MEP’s for short) are plans adopted by two or more unrelated employers. Because of economies of scale and shared administrative costs, many small businesses that otherwise would find them cost prohibitive are able to offer retirement benefits to their employees through MEP’s. However, the unified plan rule (also known as the “one bad apple” rule) meant all participants suffered if one employer neglected to meet the various qualifications. For plan years beginning after December 31, 2020, an exception is available if one participant fails to meet the qualifications and either can’t or won’t make the necessary corrections.
Costs of the SECURE Act are largely being offset by increased penalties when filing requirements for plan forms are not met on a timely basis.
Estate planning is more than simply deciding who gets your assets after your death. It includes a wide range of matters, such as (1) planning for yourself and for your family in the event you become incapacitated; (2) the appointment of guardians for your minor children, if any, in the event of the deaths of both parents; (3) the protection of assets for minors, or for beneficiaries who cannot manage money, are incapacitated, or otherwise need asset protection; (4) planning for family members who are nonresidents or noncitizens of the United States; and (5) planning for a myriad of other personal issues for your family, including tax planning.
Please note that the reasons listed above for estate planning are not necessarily limited to wealthy individuals. It can be very important to a person of modest means to see that his or her assets are used to benefit the proper beneficiaries in a wise and appropriate manner.
We hope the following discussions will be helpful:
Wills are a common estate planning tool and are the most basic device for planning the distribution of an estate upon death. Wills that are 100% handwritten by the Testator and which are either kept with the decedent’s valuable papers or are given to someone else for safekeeping, are called “holographic” wills and do not have to be witnessed, provided that two witnesses attest to Probate Court as to the Testator’s handwriting, when the holographic will is presented to the court for probate after the decedent’s death. North Carolina wills that are not entirely in the Testator’s handwriting must have two witnesses, and preferably both witnesses and the Testator will sign in the presence of a Notary Public. If there was no notary public for the signatures of the testator and the witnesses, the Clerk of Superior Court may still probate the will, after the witnesses’ signatures have been duly proven to the Court.
Unless the Will is filed with the Court and is found by the court to be valid, a purported Will has no legal significance, so any paper which purports to be a will should be filed with the Court and you should request the Court to “probate” the Will (i.e., to certify the document to be valid). By the way, a Will can be probated (i.e., certified) without having a full court administration.
Probate (Court Administration):
One meaning of “probate” is the process whereby a decedent’s will is presented to the Probate Court (i.e., The Office of the Clerk of Superior Court) and the Court determines whether or not the will is valid. In an effort to avoid confusion, we will refer to that process as “probate (certification).”
If the will is found to be valid, an Executor or other personal representative will be appointed to take control of the decedent’s assets, and to notify creditors by direct notice and/or publication of a newspaper notice to creditors. That person will be responsible for tax filings, if applicable, and for paying debts and administration expenses. This process is also called “Probate” of the Estate, and to avoid confusion we will sometimes refer to this process as “probate (administration).” The executor pays valid claims and the remaining assets are distributed to the beneficiaries pursuant to the terms of the will. After these things have been done properly, the Probate Court will close the estate file.
Probate Avoidance (or Avoiding Court-Supervised Administration of an Estate):
Since probate (administration) documents are matters of public record, the family can maintain some privacy, while saving some court charges, by avoiding probate (administration). Probate (administration) can be avoided in several ways, such as by joint ownership of assets with survivorship or by naming beneficiaries in ownership documents, which will pass outside probate. Revocable trusts also hold assets in the name of the trustee, and the trust’s assets do not pass through court probate (administration).
Consequently, many individuals seek to avoid probate (administration), or at least to minimize the process, by a combination of joint accounts with survivorship, by naming beneficiaries for transfer on death of bank and brokerage accounts, and by naming beneficiaries for other assets, including life insurance and retirement accounts. Real estate can pass by survivorship to a joint tenant with survivorship rights, or to a surviving spouse under a “tenancy by the entirety” (a form of joint ownership applicable only to husbands and wives).
Irrevocable Trusts may be used as estate planning tools, sometimes to hold life insurance policies and often for the distribution of assets for the benefit of family members who are minors or developmentally-disabled beneficiaries, and sometimes to prevent wasteful spending by a spendthrift child, or to protect assets for a family member who is in a shaky marriage or who is in a high-risk job or profession. Also, certain types of trusts can provide for management of assets and the disposition of assets to protect family wealth for several generations and are typically called generation-skipping trusts (GST) or “Dynasty” Trusts.
This article cross-references you to other related topics, such as the following:
Who gets your assets if you die without a will? This is not as simple as one might think. North Carolina has laws which deal with the disposition of the estates of decedents who die without wills, called the North Carolina Intestate Succession Act, some provisions of which might surprise you and likely would not be what you would want. Also, please be aware that some assets pass by beneficiary designation or by survivorship to individuals and do not pass under the Intestate Succession Act.
Do you need a Durable Power of Attorney, a legal document which authorizes someone to act for you and to sign legal papers on your behalf if you are incapacitated?
Do you need a Health Care Power of Attorney and Advance Directive, to authorize someone to make health care decisions for you, which may include decisions whether or not to resort to extraordinary means to prolong your life if you are terminally and incurably ill, and to allow you to die a natural death in those circumstances?
Should you have a Revocable Living Trust to avoid the need for court probate at your death, i.e. court supervision, to insure that any assets belonging to you at the time of your death are used to pay your debts, funeral and administration expenses, etc., or can you rely on family members or other trusted individuals to administer your assets without court supervision? A revocable trust is not a matter of public record and affords your loved ones with some privacy concerning the assets which you own on the date of death and to whom those assets have been left.
Would it be appropriate to create Irrevocable Trusts for the benefit of others, either during your lifetime or after your death?
If you are a business owner or partner in a business or LLC, should you consider having a Business Succession Plan for the transfer of your business interest upon your retirement, death or disability?
Would your family benefit from tax planning? With the federal estate tax exemption equivalent at $11.4 million in 2019 and increasing each year, the need for estate tax planning is not very important to many of us. But there are other tax issues, such as income tax considerations, which could benefit a family of moderate wealth, such as step-up in the cost basis of assets upon death.
This article cannot include all the estate planning possibilities and alternatives, but it is intended to give an overview of the issues involved.
It is becoming more frequent for one spouse to be a non-citizen of the United States. A different set of rules applies to non-citizen spouses than to US citizens, even if the non-citizen spouse has resided in the US for many years, and even if he or she has children who are US citizens.
When it comes to basic estate planning, residents who are non-citizens should have documents similar to those of citizens. The estate of a resident spouse who is a non-citizen must be administered in the United States, just like the estate of a US citizen, and the same rules generally apply to estate tax returns for non-citizens as for citizens. Both spouses should have wills, durable powers of attorney for financial matters, health care powers of attorney, declarations of desire to die a natural death, and sometimes revocable trusts, just like spouses who are both U.S. citizens.
A US citizen can leave property to someone who is not a US citizen or a resident, the same as he or she can leave property to US citizens. This applies not only to wills, but also to joint bank accounts, retirement accounts, life insurance, etc. However, there are some tax issues and complications about which married couples, one of whom is a non-citizen, should be aware – especially if they have high net worth, but in some instances when they have moderate wealth.
PROPERTY TRANSFERRED TO A NON-CITIZEN SPOUSE
The most notable differences between estate planning and estate administration, where there is at least one non-citizen spouse – as contrasted with estates with two spouses who are both US citizens – concern gift and estate taxes. A US citizen or resident may make unlimited transfers of assets – either during life or at death – to a spouse who is a US citizen, without gift or estate tax consequences, but if one spouse is a noncitizen, (a)transfers to the non-citizen at death generally do not qualify for the estate tax marital deduction, and (b)lifetime transfers to a US citizen or resident to a non-citizen spouse without gift tax consequences are limited per year to $155,000 in 2019, indexed for inflation in the future – which is generous, but is not unlimited.
The simplest and best way to deal with tax issues arising out of the fact that one spouse is not a US citizen would be for the non-citizen to apply for US citizenship. He or she does not necessarily have to give up citizenship in his or her native country. The US allows dual citizenship, but some countries do not. A person with dual citizenship gets all the tax benefits of being a US citizen.
In the planning process for a married couple, one of whom is a non-citizen and does not want to apply for citizenship, the tax benefits of making gifts to the non-citizen spouse within the annual gift tax exclusion limit, should be considered as a possible useful tool.
Because the threshold for estate tax is so high ($11.4 million in 2019 and indexed for inflation) it is not important for most of us to utilize the estate tax marital deduction in our planning, but (a) for couples with high net worth, estate taxes may be a very important consideration, and (b) the current lifetime exemption is scheduled to expire in 2025, and it is possible that the laws could be re-written before that date, so it is advisable to consider addressing those possible eventualities in one’s estate planning.
When both spouses are U.S. citizens, the first spouse to die can leave any amount of money or other assets to the surviving spouse, either outright or in a “marital trust,” completely free of estate tax. By utilizing the unlimited marital deduction, a couple can completely avoid federal estate taxes at the first spouse’s death, even if the deceased spouse has an extremely net worth. If the surviving spouse is a non-citizen, on the other hand, the transfers from the decedent to the surviving spouse will not automatically qualify for the estate tax marital deduction, and other steps must be taken, if the deceased spouse has a large estate, to avoid unnecessary estate tax.
Those assets may be made to qualify for the estate tax marital deduction, even after the death of the US citizen or resident spouse, if (a) the surviving spouse becomes a U.S. citizen on or before the filing deadline for the decedent’s federal estate tax return (within nine months after the date of death unless a six-month filing extension is obtained, in which case the filing deadline would be 15 months after the date of death, instead of nine months), or, (b) in the alternative, those assets are put into a Qualified Domestic Trust (QDOT) for the benefit of the surviving spouse prior to that estate tax filing deadline, and a QDOT election is made on a timely-filed estate tax return for the decedent.
Because there may be unexpected delays in an application for citizenship, a QDOT trust agreement should be drafted in favor of the noncitizen spouse, even if the spouse has applied for citizenship, and if the citizenship application has not been approved some time prior to the filing deadline, the assets should be transferred to the QDOT. If the QDOT is created and funded in a timely manner, and if the appropriate tax election is made on the Form 706, US Estate Tax Return for the decedent’s estate, the QDOT assets would qualify for the unlimited marital deduction.
If a surviving spouse becomes a US citizen after the QDOT has been created and funded, the trust assets may later be distributed to the spouse and the trust terminated, if the terms of the trust agreement so allow.
BEWARE “TAX TRAP” WHEN A DECEASED SPOUSE IS A NONRESIDENT ALIEN
Because the lifetime gift and estate tax exemption applicable to a U.S. citizen or resident is so high ($11.4 million in 2019), many people (including many attorneys) are not aware that a different set of rules is applicable to “US-situated” assets belonging to nonresident aliens, including spouses of U.S. citizens, and they may have to pay extremely high estate taxes, if a nonresident alien spouse dies first and leaves his or her “US-situated” assets in a manner which does not qualify for the estate tax marital deduction.
An estate tax return (Form 706-NA) must be filed if a nonresident alien’s “US-situated” assets exceed $60,000 in value – a much lower threshold than one might expect. “US situated” assets include real estate, tangible personal property (i.e., “things” like jewelry, furniture, collectibles and home furnishings) in the United States, and securities of U.S. companies. Certain countries have treaties with the U.S. government, which may impact the taxation of those assets.
Please note that lifetime taxable gifts made by a nonresident alien are taken into consideration in determining whether or not the tax filing threshold for an estate tax return has been met, as lifetime taxable gifts are included in the taxable assets belonging to a deceased nonresident alien. That is, gift tax and estate tax are unified for nonresident aliens in much the same manner as for US citizens and residents, but with a much lower exclusion amount.
Property left by a nonresident alien spouse to a spouse who is a US citizen will qualify for the estate tax marital deduction on the Form 706-NA, Federal Estate Tax Return for Nonresident Aliens, but property left to a non-citizen spouse must be put into a Qualified Domestic Trust (QDOT) and all the QDOT requirements must be met, in order to qualify for the estate tax marital deduction on the estate tax return for a nonresident alien decedent. If the deceased spouse is a nonresident alien, there is a good possibility that the other spouse will be a US resident only, instead of being a US citizen, so special care should be taken in order to qualify property left to a non-citizen spouse for the estate tax marital deduction. .
A determination as to which assets are “US-situated” assets and which are not, is often difficult to determine – that is, which assets may be subject to US estate tax for the estate of a nonresident alien. For example, currency which is physically located in the United States is subject to estate tax, but cash deposits in US banks are not subject to estate tax. Go figure?? It is possible that bonds would be taxable if owned directly by the decedent, but would not be taxable if owned by a partnership which is not subject to US estate tax.
Consequently, we recommend that you consult with an experienced tax professional concerning possible estate tax on US-situated assets for a nonresident alien.
This material is intended for informational purposes only and should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified tax professional.
If a loved one passes away, and after the funeral and other personal matters have been attended to, someone needs to determine whether an estate administration will be needed, whereby a personal representative for the decedent (usually called an “executor” or “administrator”) will be appointed by the probate court (the Clerk of Superior Court in North Carolina) to pay debts, funeral and administration expenses, file tax returns, etc., and to distribute the remaining assets to devisees (under a will) or to heirs (if there is no will).
Whether or not you make an appointment with our office, we suggest that you make a copy of the attachment linked to this article, titledItems to Bring to Your Initial Appointmentand gather the information included on that list, in order to determine how to proceed. That information will be needed to determine whether an estate administration will be needed or is not needed. If you would like, an attorney in our office will be happy to meet with you to make such determination.
A North Carolina Will should be filed and probated in the office of the Clerk of Superior Court in the county of the Decedent’s residence. The word “probate” has two common meanings concerning estates: The first is that the probate of a will is the process by which the Probate Court determines a Will to be valid or not valid. If valid, the Court “probates” the Will, or certifies it to be the Decedent’s Will; we will refer to this meaning as “certification,” in an effort to minimize confusion. The second meaning of “probate” refers to the process by which the estate of a decedent is administered, i.e. The probate of an estate is the administration of the estate with the Court. We will refer to this meaning as “administration,” to minimize confusion.
If there are no assets or very few assets in the Decedent’s name, it may be possible to avoid a full administration of the Decedent’s estate. For example, it may be possible to have the title to a motor vehicle transferred to a new owner without having to go through a full estate administration. Likewise, tax or medical refund checks can often be cashed without a full administration of an estate, but other procedures will need to be followed. See linked article describing alternatives to full administration of a decedent’s estate.
Please be aware that assets payable at death to a named beneficiary, or assets owned in joint names by co-owners with survivorship rights, etc. are generally not required to go through a full administration in Probate Court. Also, real estate left to specific individuals under a Will generally goes directly to the named individuals, and does not technically go through court administration, but if title is to be transferred by those individuals within two years after death, it will usually be necessary to have an administration of a decedent’s estate. In that case, an Executor would be appointed by the Court, who could release the real estate from potential creditors’ claims.
If you gather the information shown in the Items to Bring to Your Initial Appointment, our office will be happy to meet with you and advise you whether or not a full administration will be needed, and to discuss what you will need to do.
Whether or not a full administration is required, the original Will should be filed with the Court and certified by the Court to be a valid will. Occasionally assets are overlooked at the time of death and are discovered later, perhaps years later, in which case it is easier to transfer those later-discovered assets to the proper recipients if the will was certified to be a valid will shortly after the date of the decedent’s death, rather than waiting until later to have the will probated.
If you have a preliminary meeting with our office to evaluate what you will need to do to settle a Decedent’s Estate, you will not be required to retain our firm to represent you. You may go to another attorney or even try to administer the estate by yourself without an attorney, if you wish.
When someone dies, the person who will be responsible for handling the estate needs to look for the deceased person’s original will and to have it filed with the probate court (the Office of the Clerk of Superior Court in North Carolina) in the county where the decedent resided.
If there is a will, the will probably names an executor, who will be responsible for handling the estate. If there is no will, the closest family member will generally be responsible for handling a decedent’s estate and will be called the “administrator,” rather than the executor.
If you do not know whether there is a will, the person or people who were closest to the decedent should look for a will and take responsibility for it, if one is found.
If you do not know where to look, look in places like desk drawers, file cabinets, and boxes of personal papers at home (or at work, if applicable). Some people keep wills in a safe deposit box at a bank or credit union, but it may be difficult to access the box unless you are a co-owner or you have been specifically given access by the decedent by signature card at the bank or credit union. If you locate a box and cannot access it, you may need to contact the office of the clerk of court for permission to enter the box.
If you know who the decedent’s lawyer was, the lawyer may have the original signed Will, so you should contact him or her, or notify him or her of the decedent’s death. If the lawyer has the will, he or she may insist on filing it with the court himself, instead of giving the original to you, but the lawyer should be willing to give a copy to the named executor.
If you find a copy of the will, but cannot locate the original, and if the attorney does not have the original or notes which indicate where the original was to be kept, one possible place to check is with the probate court in the county where the decedent was residing at the time the will was written, as well as the county where he or she resided at death. The Office of the Clerk of Superior Court in North Carolina will hold original wills filed for safekeeping. The clerk’s office will not give you the original will if one is being held there, even if the decedent had moved to a different county before his or her death, but will advise you if they have a will and they will cooperate with the clerk’s office in the county of the decedent’s residency at death. Most jurisdictions permit a later discovered will to be admitted to probate, even though a previously probated will has not been set aside. There are no specific procedures in the North Carolina General Statutes dealing with the situation. The clerk of court is vested with exclusive original jurisdiction over wills, but will caveats or probates in solemn form can eventually be determined by a superior court judge. North Carolina case law appears to require the first will to be set aside before the second will can be admitted to probate, since the probate of the second will is considered to be a collateral attack upon the probate of the first will. This presents a conundrum, or a chicken-or-egg problem, concerning how one should proceed.
Since there are no guidelines in the General Statutes, different counties may follow slightly different procedures. We suggest filing the second will with the clerk of superior court, who may decline to proceed until a caveat or probate in solemn form of the first will has been concluded. But the upshot is that the first will can be set aside, and the second will can eventually be probated.
Wills are typically headed by a title like, “Will of John Doe” or “Last Will and Testament.” A will which was prepared by a lawyer might be stapled to a piece of colored paper (often blue or gray) and might be kept in an envelope marked “Will” or “Estate Planning Documents”, etc.
You might find a handwritten document, which may or may not be titled as a will, but the substance of which may actually be a will. Handwritten wills (called “holographic” wills) may be valid in North Carolina under certain circumstances. Sometimes, a signed document which simply says “I leave my personal residence to Mary Doe” might be a valid will, even though it is not titled as a will. Holographic wills must be 100% in the Testator’s handwriting and holographic wills are not witnessed. If a handwritten will is witnessed, it must be probated as a witnessed will.
Holographic wills in North Carolina should be kept with the decedent’s valuable papers or given to a third party, to hold for safekeeping.
“Codicils” are documents which change or add to the terms of a will without entirely revoking the prior will. Most people simply write new wills and revoke their old ones, but sometimes they write codicils, instead. Each apparent codicil should be filed for probate with the probate court. Codicils may be witnessed, just like a will, or they may be handwritten. Holographic codicils are subject to the same rules as holographic wills. A witnessed will may be modified by a holographic codicil. Both documents must be probated by the probate court.
Whether or not a full estate administration is necessary, the person who has possession of the original will must file it with the probate court in the county of the decedent’s residence after the death of the will-maker (the “Testator”) .
If you find only a copy of the will and cannot find the original, it is possible that you can file the copy with the probate court and present evidence that it should be accepted as the original. To prevail, however, you will need a credible explanation as to why the original document is not available, and to present evidence to that effect.
If you have reason to believe that someone has an original will but does not want to produce it, you can ask the clerk of superior court to bring that person in front of a probate judge, and to produce the original will.
It is suggested that you ask an experienced probate attorney to assist you.
It is more common now than it was, even a few years ago, for United States citizens to make financial provision in their estate planning documents for non-US citizens and nonresidents of the United States.
We have linked an article concerning Qualified Domestic Trusts (QDOT’s) for noncitizen spouses of United States citizens or residents. Bequests to non-citizens do not qualify for the federal estate tax marital deduction, even where the noncitizen spouse has been married to a US citizen or resident and has been living in the United States for many years. Perhaps he or she has several children who are US citizens. That discussion deals with United States Estate Tax, which is a special tax on large transfers of wealth from a person at death to other persons, which is separate and apart from income tax. Large lifetime gifts to non-citizens, including non-citizen spouses, are subject to United States Gift Tax, linked is a discussion of Gift Tax, Estate Tax and GST tax. Gift Tax was originally adopted to prevent individuals from avoiding Estate Tax by making lifetime gifts. Estate Tax and Gift Tax work in tandem with each other.
This article deals with a tax with which most of us are very familiar – income tax. The rules are very complicated for nonresident alien beneficiaries of US estates and trusts, as discussed below.
That is, this article discusses the income tax complications when an estate or trust has beneficiaries who both are noncitizens and nonresidents of the US – called nonresident aliens.
For income tax purposes, a non-US citizen who is a resident of the US pays income tax on his or her income just like citizens, and he or she is considered a “US Person” for income tax purposes.
Beneficiaries may be classified for US tax purposes as “US persons” and not as nonresidents, under certain fact situations. US persons include United States citizens, resident aliens (holders of green cards), and residents who meet the “substantial presence” test (generally those in the United States for 183 or more days each year over a 3-year period), or residents of Mexico or Canada who regularly commute to jobs inside the US. Others who may be classified as U.S. persons include certain government-related individuals, certain teachers and students, and some individuals with medical conditions which were originally contracted within the United States.
Generally traditional estate planning tools such as wills, trusts, life insurance, Section 529 educational savings plans, and annual gifting may be used for transfers to nonresident beneficiaries who are not US citizens. Some financial institutions require the completion of special forms and registrations for life insurance or for brokerage accounts that are payable to a nonresident alien beneficiary. But the transfer of income-producing assets to nonresidents can create income tax complications, whether or not they pass through an estate or trust.
Naming nonresident aliens as beneficiaries of US estates or trusts can be tricky because they may be subject not only to US tax laws, but also the laws of the country where foreign beneficiaries reside. There may be US taxes to be paid and/or taxes of the foreign country, and there are regulations, tax treaties, tax credits, etc. which may be applicable.
When a decedent dies and leaves assets to foreign beneficiaries, the executor or administrator of the decedent’s estate must determine the tax status of each foreign beneficiary, and whether it is necessary to withhold United States income tax on distributions of income from the US estate to each foreign beneficiary. The executor or administrator is required to file tax forms which are not required for estates that have no foreign beneficiaries.
Similar issues arise when a trust is created which has nonresident beneficiaries. Unlike most decedents’ estates, which are temporary in nature, trusts often last many years, during which time the trust must continue to comply with the laws of the United States and the laws of the applicable foreign country or countries.
In order to determine the tax status of a foreign beneficiary, the executor, administrator or trustee (collectively as referred to as Fiduciary) should provide to each foreign beneficiary a Form W-8BEN, to be filled in by the beneficiary and returned to the Fiduciary. That form requires the name of the individual beneficiary, his/her country of citizenship, personal residence address and mailing address, and foreign tax identification number, if any. If a foreign beneficiary also has a US Tax Identification Number (e.g. SSN), it must be included also.
Generally, a Fiduciary can rely on the information provided by the foreign beneficiary on that form for up to three years, but a new Form W-8BEN must be obtained from each foreign beneficiary every three years, updating his/her information, if he or she remains an income beneficiary.
The withholding rate for income distributions to foreign beneficiaries is usually 30%, which a Fiduciary is required to withhold from income distributions. The Fiduciary has a legal responsibility to pay those withheld income taxes to the United States Treasury each year. In many instances the foreign beneficiary receives a deduction or credit on his or her income tax return in his or her home country for US taxes paid, which softens the impact of the high US withholding tax rate but that does not simplify the filing requirements for the Fiduciary.
Withholding tax is required for a foreign beneficiary, for income which is distributed to the beneficiary – as a general rule there is no withholding tax on distributions of principal, such as a monetary bequest which does not include income earned on the monetary amount.
The withholding rates for some countries are sometimes less than 30%, due to tax treaties between the United States government and the foreign country. The rules for tax credits also vary from country to country.
Another complication for a US estate or trust is the requirement that the estate or trust must file Forms 1042, 1042-T and 1042-S in a timely manner for each applicable tax year. Form 1042 concerns how much income will be withheld for income tax withholding purposes for US-source income, for tax withholding purposes. Form 1042-S is concerned with payments of US source income made to foreign persons, and a separate Form 1042-S is required for each beneficiary. Form 1042-T is the Annual Summary and Transmittal of Forms 1042-S for the estate or trust.
Nonresident aliens who have US income from an estate or trust are required to file a Form 1040NR or a Form 1040NR-EZ in the United States, as well as any necessary tax filings in the beneficiary’s home country.
In summary, it is important for someone administering an estate or trust to know of these requirements when there are foreign beneficiaries of the estate or trust. They should also be aware of foreign beneficiaries of retirement accounts or life insurance policies, or persons who will receive assets as a surviving co-owner of assets, even if those assets do not go through probate. Often even an experienced estate planning or administration professional should seek advice and assistance from other professionals who deal regularly with nonresident beneficiaries.
Many people are unfamiliar with gift taxes. Here are some of the basics:
If you receive a gift, you don’t owe tax, and you don’t have to report the gift as income.
The recipient of a gift doesn’t owe gift tax or income tax and does not have a reporting requirement. Gift taxes are the responsibility of the donor. Except for the ones to charitable organizations, gifts are not deductible by the donor.
Not all gifts are required to be reported, and even fewer actually result in a gift tax liability.
Gifts that are always exempt from taxation include gifts to IRS-recognized charities, gifts to spouses (if they are US citizens), gifts to political organizations, and gifts to pay a person’s education tuition or medical expenses (but only if paid directly to the educational institution or medical facility – not to the individual).
There is an annual exclusion that eliminates many other gifts from taxation.
Gifts that don’t fall into one of the previous exempt categories and don’t exceed the annual exclusion are not subject to gift tax. For 2019, taxpayers may give up to $15,000 per donee without gift tax consequences and without any reporting requirements.
Gift-splitting allows a married couple to combine their exclusions so that in 2019, they may give up to $30,000 to each donee.
Lifetime Exclusion – Unified Tax Credit
Gifts in excess of the annual exclusion should be reported annually on a gift tax return. But they probably will still not result in a gift tax liability because of the unified credit. Every taxpayer is permitted a lifetime amount which they may give in the way of taxable gifts before any gift taxes apply. Taxable gifts are deducted from the unified credit. Upon the death of the taxpayer, the assets remaining in the estate are taxable if they exceed the unified credit remaining after the deduction of all taxable lifetime gifts. The unified credit amount for 2019 is $11.4 million.
Beware of situations that inadvertently result in reportable gifts.
Gifts include more than just cash transfers. If you loan money to someone either interest-free or at a below-market rate, you’ve created a gift. If you forgive debt, that’s a gift. Are you helping support an adult child? If you pay a bill of any kind (with the exception of direct payment of educational and medical payments mentioned above), those amounts need to be included when determining whether your annual gifts have exceeded the per-person annual exclusion. Transfers of property of all kinds are gifts. Remember: when applying the annual exclusion to a recipient’s gifts, you must include ALL gifts whether cash, property or otherwise.
Estate Tax, Gift Tax and Generation-Skipping Transfer (GST) Tax have nothing to do with income tax. The recipient of a gift or inherited property does not owe income tax on the gift or inheritance. Gift taxes, if any, are the primary responsibility of the donor. Those taxes are totally separate and apart from income tax. One income tax-related point, however, is that the recipient of property which has appreciated in value since acquired by the donor, takes the donor’s cost basis for income tax purposes, instead of the value of the gifted property on the date of the gift, and if the recipient sells the property at a higher value than the donor’s cost basis, there will be capital gains tax upon the sale. When appreciated property is transferred at death, instead of by lifetime gift, the recipient’s cost basis is stepped-up to the date-of-death value.
The modern estate tax was enacted in 1916. It is a tax on the transfer of assets of substantial value by a deceased person to others. The tax applies to property transferred by will or to transfers at death under state law, such as the North Carolina Intestate Succession Act. It also applies to property transferred by beneficiary designation, such as retirement accounts and life insurance proceeds on policies owned by a decedent, as well as property owned jointly with right of survivorship, payable-on-death or transfer-on-death accounts, etc., at least to the extent to which the decedent contributed to joint accounts, and transfers passing at death under revocable trust agreements.
Proponents of estate taxes consider it to be a progressive, fair source of government funding, and a good way to break up large accumulations of wealth in wealthy families. Winston Churchill once described estate taxes as “a certain corrective against the development of a class of the idle rich.”
Not too long after the adoption of the estate tax laws, people started giving away assets during their lifetimes, often on their deathbeds, to avoid estate tax at death, as a result of which, federal gift tax laws were adopted several years later, covering lifetime gifts.
To encourage some lifetime gifts in limited amounts, the gift tax laws give some “wiggle room” in allowing gifts without gift tax ramifications. Gifts which are currently exempt from gift tax include: gifts from a donor to an individual recipient which do not exceed a total value of $15,000 in a calendar year, gifts to spouses who are US citizens, and gifts for tuition as an educational expense and certain medical expenses. But please note that educational and medical gifts may not be given to an individual who uses the money to pay those expenses. Instead they must be paid directly to the educational institution or medical provider. Medical insurance premiums qualify for the medical exception, if paid directly to the insurer. Tuition and medical gifts are described in more detail under another article.
After the onset of gift taxes, creative tax planners came up with other devices to avoid estate and gift taxes on the transfer of wealth from one generation to another: Gifts could be made directly to grandchildren, for example, instead of to children, which would eventually skip a generation for gift or estate tax purposes. Also, taxable gifts could be made to trusts, instead of individuals. The trusts would have beneficiaries of multiple generations, and would not become part of the taxable estates of one or more generations of beneficiaries to receive benefits from the trusts. The trusts could make distributions to beneficiaries of one generation, without the value of the trust’s assets being subject to estate tax for a beneficiary at the time of his or her death. The trusts could simply “hang out there,” not belonging to any beneficiary for estate tax purposes, for multiple generations, without being subject to estate tax at the death of any beneficiary. Under the terms of the trust agreements, distributions could be made in the trustee’s discretion to beneficiaries from any generation, but without the principal value of the trust ever becoming part of a beneficiary’s taxable estate.
To limit that from being abused, a “generation-skipping” transfer tax was adopted in 1976. There could be perfectly good non-tax reasons for some “generation-skipping” gifts, such as the protection of assets for grandchildren if their parent had financial or other personal problems. Consequently, generation-skipping gifts were not abolished for tax reasons, but they were limited instead.
The generation-skipping transfer tax laws are very complicated and are commonly used only by very wealthy families, so we will not discuss those laws in detail here, but we will focus on gift tax and estate tax laws and their unified tax system. We recommend that anyone who is interested in generation-skipping transfer tax planning should discuss the same with one or more qualified professionals.
Federal Estate Tax
The federal estate tax applies to the transfer of property from US citizens or residents at death. Under the Tax Cuts and Jobs Act effective in 2018, the estate tax exemption is now $11.4 million (in 2019) for single persons, and with effective tax planning, $22.8 million for married couples. That Act is currently scheduled to be effective only through 2025, during which time the exemption will be indexed annually for inflation. Taxes on assets in excess of the exemption are taxed at a 40% rate. However, if a decedent is married, he or she may leave unlimited assets in excess of that value to his or her spouse, either outright, in a “marital trust” or in a “Qualified Domestic Trust” (QDOT) for non-citizen spouses, free of estate taxes at the first spouse’s death, but which will later be taxable as part of the surviving spouse’s estate. For a marital trust or a QDOT to qualify for the estate tax marital deduction, certain rules must be followed. We have a separate article discussing QDOT trusts for noncitizen spouses.
The tax basis (for capital gains tax purposes) is stepped up to the date-of-death value, which means that any unrealized capital gains on that date are never subject to capital gains tax. Journalist Michael Kinsley called this the “angel of death loophole.”
The estates of both US citizens and US residents are subject to estate tax.
Please be aware that different rules apply to estate taxes where one spouse is a non-citizen of the United States, even if the non-citizen spouse has been a resident of the United States for many years. Transfers to a non-citizen spouse do not qualify for the estate tax marital deduction unless they are left to a QDOT trust, and a certain election is made on a timely-filed estate tax return. But if the spouse becomes a US citizen before the filing deadline for the estate tax return, those transfers would qualify for the deduction without a QDOT.
Also be aware that estates of non-citizens who are nonresidents of the United States (“nonresident aliens”) and who own certain assets located in the United States, are required to file estate tax returns (on Forms 706-NA) for those “US-situated” assets, if those assets exceed $60,000 in value. That is, the applicable exemption for nonresident aliens on those assets is only $60,000, in stark contrast with an exemption of $11.4 million in 2019 for US citizens or residents.
Federal Gift Tax
Congress enacted the federal gift tax to prevent US citizens and residents from avoiding estate tax by transferring their wealth before they die.
The federal gift tax laws currently allow an amount each year that may be disregarded for both gift (and later estate) tax purposes, called the “annual exclusion.” The current exclusion in 2019 is $15,000 per year for total gifts to a recipient made during the year, applicable to “present interest” gifts. That is, a gift which is to take effect in the future, instead of immediately, does not qualify for the annual exclusion. The annual exclusion is granted to a donor separately for each recipient. A married couple would each have annual exclusions, so the couple could collectively give $30,000 in 2019 to a recipient, and the collective gifts could be made either from their separate assets or from the assets of both spouses, to each recipient.
The gift tax laws also provide a lifetime exemption for taxable gifts made by US citizens and residents (currently $11.4 million per donor in 2019), which is the same amount as the federal estate tax exemption, and the gift tax laws and the estate tax laws are integrated into one “unified” system, i.e. – taxable lifetime gifts reduce the exemption amount available at death on the federal estate tax return, and any taxes actually paid on lifetime gifts are credited toward the federal estate tax at death.
Gifts to spouses who are US citizens are not taxable, and there is no limit to the amount which can qualify for the gift tax marital exclusion. However, the unlimited marital exclusion does not apply for non-citizen spouses, even if they have been residents for many years. Gifts from a US citizen or resident to a non-citizen spouse are exempt up to $154,000 per year in 2019, indexed for inflation.
Another rule applicable to noncitizen spouses: If a US citizen or US resident spouse deposits money into an account in joint names with a spouse who is a US citizen, there is no gift unless the other spouse withdraws money from the account; that is, if the spouse who transferred the money into the account dies, the entire balance transferred by the decedent is treated as part of the taxable estate of the deceased spouse. However, if the account is a joint account with a noncitizen spouse with right of survivorship, then the account is generally treated as owned one-half by each spouse, meaning that a taxable gift has occurred on the creation of the account, except to the extent that money was contributed by the noncitizen spouse, and would be treated as a taxable gift, to the extent that it exceeds the annual gift tax exclusion (of $154,000 in 2019, indexed for inflation). There is a narrow exception to that rule, however, if the parties can prove that their intent was that the money was not to be withdrawn by the noncitizen spouse except for a special purpose which had not occurred.
Gifts include more than just cash transfers. Gifts of assets other than cash (e.g., stocks and bonds, mutual fund shares, partnership or LLC interests, parcels of real estate, etc.) are taxed at their fair market value on the date of the gift. The payment of rent or similar expenses for an adult recipient would be a taxable gift. If someone lends a large amount of money to someone else, either interest-free or at a very low rate of interest (the US Treasury Department publishes an official rate of interest each month, called the Applicable Federal Rate (AFR); if you charge less than the AFR for loans of totaling more than $10,000 to the borrower, the difference is deemed to be a gift).
Gift Tax Marital Deduction for Same-Sex Marriages
North Carolina denied marriage rights to same-sex couples by statute adopted in 1996. A state constitutional amendment was approved in 2012 which defined marriage between a man and a woman as the only “domestic legal union.” This amendment was approved by North Carolina voters by 61% to 39% vote.
In 1996 a federal law was adopted titled the Defense of Marriage Act (DOMA), Section 3 of which defined marriage as the legal union of one man and one woman.
Since those dates, state and federal court decisions have affected federal gift, estate and GST tax laws as they apply to same-sex marriages.
In 2013 a US Supreme Court decision recognized same-sex marriages for gift, estate and GST tax, provided that those marriages were valid under the laws of the states in which those marriages occurred, and it made no difference whether either spouse was a resident of the state in which the marriage occurred. It also makes no difference whether same-sex marriages are recognized in the state of residence of the married couples.
In Notice 2017-15, the IRS described the procedures which same-sex couples may use to re-calculate the marital exclusion amounts for property transferred to spouses before the US Supreme Court invalidated Section 3 of DOMA in 2013, if the gifts did not qualify for the marital deduction for federal gift, estate or GST tax purposes, solely because of DOMA.
If the applicable limitations period has not expired, a taxpayer may file an amended gift tax return or a supplemental estate tax return, on which he or she may claim a refund for taxes which have been paid, as well as restoration of the taxpayer’s applicable exclusion amount.
After the limitation period has expired, no refund can be claimed, but Notice 2017-15 allows the taxpayer to recalculate his or her applicable exclusion amount as a result of recognizing the marriage, and may recalculate the taxpayer’s remaining applicable exclusion amount as directed by the IRS in its forms and instructions.
Many of the issues have been resolved in a taxpayer-friendly way.
This material is intended for informational purposes only and should not be construed as legal or tax advice and is not intended to replace the advice of a qualified tax professional.