Estate Tax Planning NC & SC | 2026 Federal Exemption Sunset

Federal Estate Tax — The Basics

The federal estate tax is imposed by IRC § 2001 on the transfer of a decedent’s taxable estate. Key concepts:

• Gross estate (IRC § 2031): everything you own at death — real estate, financial accounts, life insurance proceeds where you own the policy, retirement accounts, business interests.
• Deductions (IRC §§ 2053–2058): debts, funeral expenses, the unlimited marital deduction (transfers to a US citizen spouse), and the unlimited charitable deduction.
• Taxable estate = gross estate minus deductions.
• Applicable exclusion (IRC § 2010): the lifetime “free” amount. For 2025, $13.99M per individual.
• Tax rate (IRC § 2001(c)): 40% on every dollar above the exclusion.
• Portability (IRC § 2010(c)(4)): a surviving spouse can use the deceased spouse’s unused exclusion (DSUE), effectively doubling the couple’s exemption — but only if a Form 706 is timely filed at the first spouse’s death.

The 2026 Sunset — What’s Actually Changing

The TCJA doubled the base exemption from $5M (indexed) to $10M (indexed) for tax years 2018 through 2025 (IRC § 2010(c)(3)(C)). After December 31, 2025, the doubling provision expires. Without congressional action, the exemption reverts to $5M indexed for inflation — projected to be roughly $7M per person in 2026 dollars.

North Carolina Has No State Estate Tax

North Carolina repealed its state estate tax effective January 1, 2013 (Session Law 2013-316, repealing former N.C.G.S. § 105-32.1 et seq.). NC has no inheritance tax either. The only tax considerations at the state level are:

• NC fiduciary income tax on income earned by the estate or trust during administration (N.C.G.S. § 105-160 et seq.).
• NC’s normal income tax on income in respect of a decedent (IRD) received after death.

South Carolina Has No State Estate Tax

South Carolina repealed its state estate tax effective January 1, 2005, when the federal credit for state estate taxes (the “pickup tax”) was eliminated by EGTRRA. The repeal is reflected in S.C. Code § 12-16-510 (now a vestigial provision). SC has no inheritance tax. Like NC, SC imposes:

• SC fiduciary income tax during estate administration (S.C. Code § 12-6-510 et seq.).
• Normal SC income tax on IRD received after death.

Strategies for Moderate-Wealth Families ($3M–$13M Estates)

For families in this range, the 2026 sunset is the operative question. Several strategies are worth considering before December 31, 2025.

1. Annual Exclusion Gifts (IRC § 2503(b))

Every year, every donor can give up to $19,000 (2025) to every recipient without using any lifetime exemption and without filing a gift tax return. A married couple can give $38,000 per recipient annually. Over 10 years, a couple gifting $38,000 to each of two children and four grandchildren can move $2.28M out of the estate — entirely outside the exemption — with zero tax cost. This is the foundation of any estate-tax-aware plan, regardless of the sunset.

2. Direct Tuition and Medical Payments (IRC § 2503(e))

Payments made directly to an educational institution for tuition, or directly to a medical provider for medical expenses, are unlimited and not subject to gift tax. This is in addition to the $19,000 annual exclusion. Grandparents paying private-school tuition for grandchildren are using this strategy.

3. 529 Plan Superfunding (IRC § 529(c)(2)(B))

You can contribute up to 5 years’ worth of annual exclusion gifts to a 529 plan in a single year — $95,000 per donor per beneficiary in 2025 ($190,000 per married couple). The contribution is treated as spread over 5 years for gift tax purposes. A grandparent with several grandchildren can move significant assets this way. NC’s NC 529 and SC’s Future Scholar program both qualify; NC offers a small state tax deduction (up to $2,500 NC AGI) under N.C.G.S. § 105-153.5(b)(13), and SC offers a more generous deduction up to the full amount contributed under S.C. Code § 12-6-1140(11).

4. Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust where one spouse (the donor) makes a gift to a trust for the benefit of the other spouse (and often descendants). The non-donor spouse can receive distributions during life — so the family retains indirect access to the assets — while the assets are out of both spouses’ taxable estates. Key planning points:

• The gift uses the donor’s lifetime exemption. A pre-2026 SLAT can be funded with up to ~$13.99M without gift tax.
• Anti-clawback (Treas. Reg. § 20.2010-1(c)) protects the gift.
• Spouses cannot make reciprocal SLATs that are structurally identical — the “reciprocal trust doctrine” (Estate of Grace, 395 U.S. 316 (1969)) would unwind the planning.
• SLATs require careful drafting and an experienced tax attorney. Ryan does not draft SLATs in-house; he coordinates with a tax specialist when a SLAT is the right answer.

5. Lifetime Gifts Using the Current Exemption

For families well above the projected $7M post-sunset exemption, simply making outright gifts before December 31, 2025 — using the current $13.99M exemption — preserves the benefit. Each spouse can gift $13.99M outright; the anti-clawback regulation protects the planning even if the exemption later decreases.

6. Grantor-Retained Annuity Trust (GRAT)

A GRAT (IRC § 2702) allows you to transfer asset appreciation out of your estate at a discounted gift tax cost. The donor contributes an asset to the trust, retains an annuity stream, and any appreciation above the IRS Section 7520 rate passes to beneficiaries gift-tax-free. Best used for rapidly appreciating assets (e.g., pre-IPO stock). Like SLATs, GRATs require specialist drafting — Ryan refers GRAT work out.

7. Irrevocable Life Insurance Trust (ILIT)

An ILIT owns a life insurance policy outside the insured’s taxable estate (IRC § 2042). Properly structured, the death benefit passes to beneficiaries free of estate tax. Useful when life insurance is intended to provide liquidity for estate-tax payment or to equalize distributions among children. ILIT setup is within scope for Ryan; ILIT administration (Crummey notices, premium gift coordination) requires annual attention.

Strategies for High-Net-Worth Families ($13M+ Estates)

Families above the current exemption have a more urgent and more complex set of choices. Ryan does not represent ultra-high-net-worth families on estate tax matters in-house — the technical complexity warrants a dedicated tax attorney or boutique trusts-and-estates firm. Ryan handles the foundational estate plan (wills, revocable trust, powers of attorney) and coordinates with the tax specialist.

Other Considerations

Step-Up in Basis (IRC § 1014)

At death, appreciated assets receive a stepped-up cost basis equal to fair market value. A lifetime gift carries the donor’s original cost basis (IRC § 1015). For non-taxable estates, holding appreciated assets until death is usually better than gifting them — the family avoids capital gains tax on the appreciation. For taxable estates, the math reverses: estate tax at 40% is worse than capital gains at 23.8% (long-term plus net investment income tax). The crossover analysis is asset-specific.

Portability (IRC § 2010(c)(4))

When the first spouse dies, the surviving spouse can elect to “port” the unused exemption forward — effectively doubling the surviving spouse’s exemption. The election requires a Form 706 filed within 9 months (or 15 months with extension) of the first death. Portability does NOT apply to the GST exemption. Many estates miss this election because no Form 706 is otherwise required; we flag the issue at every first-spouse death where portability could matter under future exemption levels.

Generation-Skipping Transfer Tax (IRC § 2601)

A separate 40% tax applies to transfers to grandchildren and later generations that “skip” the children’s generation. The GST exemption matches the estate-tax exemption ($13.99M in 2025, projected ~$7M in 2026). GST planning is essential for families with grandchildren who may benefit from family wealth.

State Income Tax on Trust Income

NC and SC both tax fiduciary income earned by an irrevocable trust where the trustee or beneficiaries are NC/SC residents. Trust situs planning (locating the trust in a state with no fiduciary income tax) is part of advanced planning — coordinate with the tax specialist.

Action Items by Timeline

How Ryan Approaches Estate Tax Planning

Ryan’s practice is centered on flat-fee estate planning for NC and SC families. For estate tax matters, his role is to:

1. Project the estate honestly. A real number, including appreciation projections.
2. Identify whether tax planning is needed. For most NC/SC families, it isn’t — the estate is well below the exemption.
3. Build the foundational plan. Will, revocable trust, powers of attorney, healthcare directive, beneficiary coordination — all flat-fee.
4. Coordinate with a tax specialist when warranted. Ryan maintains working relationships with tax-focused trusts-and-estates attorneys and can make a warm introduction.
5. Avoid overengineering. A SLAT is the right tool for some families and the wrong tool for most. We don’t build complex plans where simpler plans work.

Understanding the Math: A Sample Estate

Consider a married couple in Charlotte with the following estate at the husband’s death in 2028 (three years post-sunset):

• Primary residence: $1.8M
• Lake Norman second home: $1.2M
• Brokerage and bank accounts: $4.5M
• Husband’s 401(k): $1.6M
• Husband’s term life insurance, no ILIT: $2M death benefit
• Wife’s IRA: $1.4M
• Closely-held LLC interests: $1.5M

Total gross estate: $14M. With the projected 2028 exemption around $7.4M (continuing to index), and assuming everything passes to the wife under the unlimited marital deduction (IRC § 2056), the husband’s estate owes zero federal estate tax. So far, so good — until the wife’s death.

If the wife dies in 2035 with the combined assets having grown to $20M, her exemption (with portability of the husband’s DSUE) totals roughly $15M ($7.5M of each, projected). The taxable estate of $5M is taxed at 40%, producing a $2M federal estate tax bill. With pre-2026 planning (using the elevated exemption to gift $6M into a SLAT or directly to children), that tax bill would have been near zero — because the gifted assets would have grown outside the estate, and the protected exemption use would have absorbed more of the remainder.

This is the math underlying every conversation about the 2026 sunset for moderate-wealth Carolinas families. It’s not a question of whether the tax applies — it’s a question of timing and structure.

Income Tax vs. Estate Tax — The Tradeoff

Lifetime gifts and estate transfers create different tax consequences. Understanding the tradeoff is essential to picking the right strategy.

Lifetime gift (carryover basis under IRC § 1015)

When you gift an appreciated asset during life, the recipient takes your cost basis. If you bought stock for $10,000 and it’s now worth $100,000, the gift is $100,000 — but if the recipient later sells, they owe capital gains tax on the $90,000 of appreciation. Total tax exposure: 23.8% × $90,000 = $21,420 if the recipient is in the top bracket.

Death transfer (stepped-up basis under IRC § 1014)

When the same asset passes at death, the recipient’s basis is the date-of-death value — $100,000. They can sell immediately for $100,000 with zero capital gains tax. But if the donor’s estate is taxable, the asset is subject to 40% estate tax above the exemption: $40,000 on $100,000 of value.

The crossover

For non-taxable estates (most NC and SC families), holding appreciated assets until death is always better than gifting — the step-up wipes out capital gains tax, and there’s no estate tax. For taxable estates, the analysis flips: estate tax at 40% is worse than capital gains at 23.8%, so lifetime gifts make sense (assuming the donor can afford to part with the assets). For families straddling the line, the strategy depends on which assets are appreciating, the donor’s income tax bracket, and the recipient’s tax bracket.

Common Misconceptions About Estate Tax

“My estate isn’t big enough to matter.”

Possibly true at today’s exemption, but the calculation should run forward 10–20 years with reasonable growth. A $4M estate today at 6% annual growth becomes $7.2M in 10 years and $12.9M in 20. If the exemption holds near $7M post-sunset, that $4M estate becomes taxable in your lifetime.

“I’ll just give everything to my spouse to avoid the tax.”

The unlimited marital deduction (IRC § 2056) defers estate tax — it doesn’t eliminate it. Whatever survives the first death is fully exposed at the second death. Portability mitigates this by carrying the deceased spouse’s unused exemption forward, but the planning still requires a Form 706 filing at the first death.

“I have a revocable trust, so I don’t have estate tax issues.”

A revocable trust does not reduce estate tax. Because you retain control (the power to revoke), trust assets are included in your gross estate under IRC § 2038. Estate tax planning requires irrevocable structures or lifetime gifts. The revocable trust is a probate-avoidance tool, not a tax tool.

“Life insurance is tax-free.”

Life insurance death benefits are exempt from income tax (IRC § 101) — but if you own the policy, they’re included in your gross estate (IRC § 2042). For families using life insurance to provide estate liquidity, owning the policy through an ILIT removes it from the estate.

“My retirement account passes directly to my kids, so it skips probate and tax.”

Beneficiary designations do skip probate. But IRAs and 401(k)s are included in the gross estate for estate tax purposes (IRC § 2039), and they carry “income in respect of a decedent” — the beneficiary owes ordinary income tax on every withdrawal. The SECURE Act forces most non-spouse beneficiaries to drain inherited accounts within 10 years, accelerating the income tax bite. For taxable estates, retirement accounts can be the worst-taxed asset in the inheritance.

The Connection to Probate Avoidance

Estate tax planning and probate avoidance are different problems with different tools. A revocable living trust avoids probate but does nothing for estate tax. An irrevocable trust may reduce estate tax but adds complexity and gives up control. Annual exclusion gifts reduce the taxable estate without changing probate exposure. Different families need different combinations:

• Estate under $5M, no tax exposure: Revocable living trust for probate avoidance. No tax planning required. See our trusts page.
• Estate $5M–$13M, tax exposure possible after sunset: Revocable living trust plus annual exclusion gifts. Consider funding planning before December 2025 if the estate is trending upward.
• Estate $13M+, current and ongoing tax exposure: Revocable trust plus irrevocable trust structures. Coordinate with a tax specialist.

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