In Estate Tax Haven North Carolina, ILITs Offer Legacy Planning Benefits

North Carolina isn’t just “a better place to be” for retirement, as its state slogan suggestions. It’s also a great place to settle an estate. This southeastern state features some of the more tax-friendly laws in the nation, one of the best being the complete elimination of estate and inheritance tax at the state level.

North Carolina residents only recently got to enjoy this benefit when the state repealed the tax in 2013. Some view the state as a haven for wealthier retirees. That’s because North Carolina also uses a flat income tax that doesn’t penalize those with higher incomes.

What You Need to Know About North Carolina Taxes

What you need to know is North Carolina is a pretty tax-friendly state, especially for the wealthy. Rather than have a tax rate tiered by income, like most other states and the federal government, they charge a flat 5.75% to all residents with earned or retirement income and don’t tax Social Security benefits.

Trusts in the state that gain income directly from North Carolina businesses, or pay funds to a North Carolina beneficiary, may also be taxed at this rate. In this case, the fiduciary for the trust would be responsible for paying the tax, not the individual receiving the funds.

The state does not tax estates or the inheritances of beneficiaries of the estate. In addition, any life insurance benefits paid out are not taxed. All of this makes North Carolina seem like the ideal tax shelter for just about any wealthy individual – and it is! But that does not negate the need for an estate plan.

Do You Still Need a Life Insurance Trust in North Carolina?

An irrevocable life insurance trust (ILIT) may seem unnecessary to North Carolina residents, due to the state’s tax-friendly status. However, state taxes aren’t the only issue that your estate could face on your death. ILITs provide the following benefits:

  • They shield assets from federal estate taxes, which can go as high as 40%.
  • They offer protection from creditors for your estate and its beneficiaries by removing the money from your name and making the proceeds unassignable.
  • They can be used to control the spending of irresponsible or very young beneficiaries.
  • They protect your assets from judgments.
  • They reduce the cost of settling your estate by limiting what needs to go through probate.
  • They speed the settlement of your estate and provide a pool of funding for covering any property or transfer costs.
  • They can be used to provide long-term, guaranteed funding for disabled heirs.

ILITs aren’t just a good way to work around estate taxes. They also reduce the cost of settling your estate. Otherwise, some assets may have to go through probate, which is an expensive and lengthy process, even with a will. If you fear that the battle for your assets may be contentious, a combination of revocable trusts and an ILIT is a good way to reduce that risk. It allows you to give your estate away in a private, uncontested manner, providing peace of mind and certainty.

Our use of various life insurance-backed strategies has helped to discount many of our clients’ estate tax costs by up to 90%. We use a variety of insurance products to help you plan out your legacy while protecting your assets. For more information on using an ILIT for asset protection, contact a Howard Kaye advisor at 800-DIE-RICH.