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The Cost of Dying

David Silver teaches The Legal Environment of Business in ECU's Department of Finance. Dave is also a Partner with The Graham.Nuckolls.Conner Law Firm in Greenville, NC, concentrating in Elder Law

"Death taxes" and "probate fees." These two terms give visions to some people of "the government" taking from their family's hands almost all of their hard earned wealth at their death. A better understanding of these terms should make these concepts a lot less intimidating.

The "death tax" is a slang term for "estate tax" - a federal tax payable on the assets that you have at your death. However, since a person could almost as easily give away all of their assets on their death bed, "death taxes" and taxes on gifts prior to death are considered together. All gifts, whether they are given during life or after death, are taxable to the gift giver (you don't have to pay any taxes on the gifts you receive). The gift giver pays taxes of up to 40% on the gift, but only if that gift giver has already given away millions of dollars. As a result of the unified federal gift and estate tax exemption, you can give away $5.34 million without paying any gift or estate tax. The $5.34 million increases every year with inflation (it was $5.0 million in 2011). It is called "unified" because all gifts are counted the same way no matter if they occurred during life or after death. For example, if you give away $1 million during your lifetime, you still can give $4.34 million at your death tax free.

Gifts (either during life or at death) include cash, stock, land, businesses, personal property, trusts and life insurance proceeds. Every year, a gift giver can give away $14,000.00 each to any number of individuals without it counting against their unified gift and estate tax exemption (a good strategy if you are worried that your estate will be over $5 million). Gifts to a spouse (who is a U.S. Citizen) are not subject to either gift or estate taxes, and a surviving spouse can utilize the deceased spouse's unused gift and estate tax exemptions through a concept called "portability" (the surviving spouse could leave up to $10.68 million without paying any gift or estate taxes). As a result of these and other exemptions, less than 0.5% of estates ever have to pay any "death taxes."

Unless you are a multi millionaire, you do not need to worry about the "death tax." The next concern to alleviate is "probate fees." Probate fees are payable to the state, and each state's laws are different. While probate fees can be very high in some states (for example, New York, where many financial television shows are produced), they are relatively low in North Carolina.

Not all of the assets in an estate are subject to probate fees. When someone dies, some assets automatically pass to others without the court's involvement, like life insurance proceeds and Payable-On-Death bank accounts. These types of assets are considered non-probate assets, and are not subject to probate fees. Land is also a non-probate asset in North Carolina. Other assets can't be passed after death without the authority of the court, like title to a car, an un-cashed check or bank account that did not list a beneficiary. These types of assets are probate assets and are subject to probate fees.

The overwhelming majority of most people's assets end up being non-probate (the house, IRA or life insurance with a beneficiary designated, POD bank account). Only the assets where the court's help is needed to make a transfer after death are subject to a probate fee. In North Carolina, probate fees are only 0.4% of all probate assets ($4 for every $1,000), with a cap of $6,000. In order to reach the probate fee cap, you need to have $1.5 million of probate assets. You can avoid probate altogether by putting all of your assets in a trust, but before doing so you should consider the cost of the trust compared to the amount of probate fees that are actually being avoided. What makes sense in another state might not be worthwhile in North Carolina.

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