An important component of estate planning is consideration of Gift Tax implications. The Internal Revenue Service defines a gift as "any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax." Federal gift tax law does not apply to transfers made between legally recognized U.S. citizen spouses nor gifts made to charitable organizations. Federal gift tax law currently allows for gifts of $12,000.00 to be made from one individual to another individual each year without triggering gift tax liability. This means that one person may make as many $12,000.00 gifts (in money or money's worth) to an unlimited number of beneficiaries, with a lifetime exemption of $1,000,000.00. Individuals may also make an unlimited payments directly to a provider of medical care or education on behalf of another (i.e., paying a college directly for another's tuition).

Peculiarities of North Carolina Gift Tax

North Carolina gift tax law parallels federal gift tax law in many respects, with two major exceptions. For non-spousal, non-charitable gifts made on or after January 1, 2002 and before January 1, 2009, North Carolina's lifetime gift tax exemption is only $100,000.00 rather than $1 million. The second major exception is that for non-spousal, non-charitable gifts made on or after January 1, 2002 and before January 1, 2009, North Carolina, unlike Federal law, imposes different rates of tax on different classes of beneficiaries. When a gift greater than $12,000.00 is made from one individual to another non-spouse individual, the amount exceeding the exemption is subject to North Carolina and federal gift tax, paid by the person making the gift. North Carolina gift tax law has three classes of beneficiaries, with differing tax rates. The first class of beneficiaries are lineal relatives, such as children, stepchildren, or parents of the person making the gift. Gifts to first class beneficiaries are subject to gift tax starting at one percent (1%) of the first $10,000.00 above the exemption. The second class of beneficiaries are siblings, aunts and uncles, or nieces and nephews of the person making the gift. Gifts to second class beneficiaries are subject to gift tax starting at four percent (4%) of the first $5,000.00 above the exemption. The third class of beneficiaries are all other relatives and legal strangers, such as unmarried partners of the person making the gift. Gifts to third class beneficiaries are subject to gift tax starting at eight percent (8%) of the first $10,000.00 above the exemption. By great contrast, North Carolina law allows unlimited gifting between legal spouses.

As of January 1, 2009, North Carolina's separate gift tax will be repealed and no longer apply to gifts exceeding the annual exemption amount.

Unintentional Gifts Between Unmarried Partners

According to North Carolina state law, a gift is made whenever "property is transferred for less than adequate and full consideration in money or money's worth." Intent to make a gift is irrelevant. As a result, unmarried partners who share a household may make unintentional gifts to one another on a yearly basis. This may happen between unmarried couples where there is a vast income differential or only one working partner. If the couple shares a joint checking account that one individual contributes the majority, if not all, of the deposits for household expenses, then the individual contributing such money is unintentionally gifting the benefit of that money to the non-working partner. Gifting can also occur when one partner owns the home the couple lives in, but then re-deeds the house into both names, creating a joint tenancy (with or without right of survivorship). The first partner has gifted one-half of the equity in the house to the second partner. Transfers of property greater than $12,000 between unmarried partners are taxable gifts. By contrast, both federal and state law allow for unlimited gifting between married spouses.

Joint Trusts Between Unmarried Partners

For many legally married couples, a joint revocable trust is a common estate planning tool. Joint revocable trusts are an attractive way to allow a married couple to avoid the probate process after each of their deaths while ensuring that children receive money and property in controlled distributions. Once created, joint revocable trusts are funded by the married couple transferring separately titled or jointly titled assets into the name of the trust, such as brokerage accounts or real estate. A legally married couple may transfer an unlimited amount of money and property into the name of their joint revocable trust without triggering gift tax liability.

For unmarried partners, ill-advised creation of a joint revocable trust may result in unintentional gifting, triggering gift tax liability for both partners. For example, whether a home that is owned in the name of one partner is transferred into the name of both partners or into the name of joint trust, the partner making the transfer has made a potentially taxable gift.

Creation of a joint revocable trust between unmarried partners may also create conflict if the couple later separates. Unmarried couples do not have access to the formalities of property distribution under state divorce law. Once individually owned property is jointly titled, former couples are left without default legal rules as to how to treat their property. These couples are then left to decide, or dispute, between themselves as to how to re-title property held in joint trust.

To read more about property ownership as an estate planning tool, please read the page on Property Ownership.