GENERAL ASSEMBLY OF NORTH CAROLINA

SESSION 1995

S	1 

SENATE BILL 121

Short Title:  Inheritance/Gift Tax Changes.	(Public)

─────────────────────────────────────── 
Sponsors: Senators Kerr, Cochrane, Hoyle; Carpenter, Forrester, Foxx, and Hobbs.

─────────────────────────────────────── 
Referred to:  Finance.

─────────────────────────────────────── 

February 1, 1995

A BILL TO BE ENTITLED
AN ACT TO INCREASE THE CLASS A INHERITANCE TAX CREDIT, TO REDUCE THE INHERITANCE AND GIFT TAX RATES FOR CLASS B AND C BENEFICIARIES, TO CONFORM NORTH CAROLINA INHERITANCE AND GIFT TAX PROVISIONS TO FEDERAL ESTATE AND GIFT TAX PROVISIONS REGARDING QUALIFIED TERMINABLE INTEREST PROPERTY, AND TO MAKE OTHER INHERITANCE TAX CHANGES.
The General Assembly of North Carolina enacts:
Section 1.  G.S. 105-4 reads as rewritten:
"§ 105-4. Rate of tax – Class A.
(a)	Rate. –A Class A beneficiary of a decedent is the decedent's lineal issue, lineal ancestor, adopted child, stepchild, or son-in-law or daughter-in-law whose spouse is not entitled to an interest in the decedent's property.  The rate of tax on property transferred to a Class A beneficiary is the percentage set in the following table for each one hundred dollars ($100.00), or fraction thereof, of value of the property:
  Value of Property Transferred	   Rate
First $10,000 	  1 %
Over $10,000 and to $25,000 	  2 %
Over $25,000 and to $50,000  	  3 %
Over $50,000 and to $100,000	  4 %
Over $100,000 and to $200,000 	  5 %
Over $200,000 and to $500,000 	  6 %
Over $ 500,000 and to $1,000,000 	  7 %
Over $1,000,000 and to $1,500,000	  8 %
Over $1,500,000 and to $2,000,000 	  9 %
Over $2,000,000 and to $2,500,000 	 10 %
Over $2,500,000 and to $3,000,000 	 11 %
Over $3,000,000	 12 %.
(b)	Credit. – An inheritance tax credit of thirty-three thousand one hundred fifty dollars ($33,150) is allowed against the tax imposed by this Article on the transfer of property to a Class A beneficiary. This
credit is allowed to Class A beneficiaries in the following order:
(1)	Children who are less than 18 years old, and children who are at least 18 years old and who are single, are unable to support themselves because of mental or physical incapacity, and either are members of the decedent's household or, because of their mental or physical incapacity, live in an institution.
(2)	Other Class A Beneficiaries. 
The status of a beneficiary is determined as of the date of the decedent's death. When two or more beneficiaries are equally entitled to the credit, the credit shall be allocated among those beneficiaries on a pro rata basis according to their tax liability. The credit allowed by this section may not exceed the amount of tax imposed by this Article."
Sec. 2.  G.S. 105-5 reads as rewritten:
"§ 105-5. Rate of tax – Class B.
A Class B beneficiary of a decedent is the decedent's brother, sister, descendant of a brother or sister, or uncle or aunt by blood.  The rate of tax on property transferred to a Class B beneficiary is the percentage set in the following table for each one hundred dollars ($100.00), or fraction thereof, of value of the property:
  Value of Property Transferred	   Rate
First $5,000 	  3%
Over $5,000 and to $10,000 	  4%
Over $10,000 and to $25,000	  6 %
Over $25,000 and to $50,000 	  7 %
Over $50,000 and to $100,000	  8 %
Over $100,000 and to $250,000 	 10 %
Over $250,000 and to $500,000 	 11 %
Over $500,000 and to $1,000,000 	 12 %
Over $1,000,000 and to $1,500,000	 13 %
Over $1,500,000 and to $2,000,000 	 14 %
Over $2,000,000 and to $3,000,000 	 15 %
Over $3,000,000 	 16 %."
Sec. 3.  G.S. 105-6 reads as rewritten:
"§ 105-6. Rate of tax – Class C.
A Class C beneficiary of a decedent is a person who is not a Class A or Class B beneficiary.  The rate of tax on property transferred to a Class C beneficiary is the percentage set in the following table for each one hundred dollars ($100.00), or fraction thereof, of value of the property:
  Value of Property Transferred	    Rate
First $5,000	  4%
Over $5,000 and to $10,000	  6%
Over $10,000 and to $25,000 	  8%
Over $25,000 and to $50,000 	 10 %
Over $50,000 and to $100,000 	 11 %
Over $ 100,000 and to $250,000 	 12 %
Over $ 250,000 and to $500,000 	 13 %
Over $ 500,000 and to $1,000,000	 14 %
Over $1,000,000 and to $1,500,000 	 15 %
Over $1,500,000 and to $2,500,000 	 16 %
Over $2,500,000 	 17 %."
Sec. 4.  G.S. 105-188(f) reads as rewritten:
"(f)	The rates of tax on net gifts are based on the relationship between the donor and the donee and are as follows:
(1)	For a donee who is the lineal issue, lineal ancestor, adopted child, or stepchild of the donor, the rate is the percentage set in the following table for each one hundred dollars ($100.00), or fraction thereof, of value of the gift:
    Value of Gift	    Rate
First $10,000	  1 %
Over $10,000 and to $25,000	  2 %
Over $25,000 and to $50,000	  3 %
Over $50,000 and to $100,000	  4 %
Over $100,000 and to $200,000	  5 %
Over $200,000 and to $500,000	  6 %
Over $500,000 and to $1,000,000	  7 %
Over $1,000,000 and to $1,500,000	  8 %
Over $1,500,000 and to $2,000,000	  9 %
Over $2,000,000 and to $2,500,000	 10 %
Over $2,500,000 and to $3,000,000	 11 %
Over $3,000,000	 12 %.
(2)	For a donee who is the donor's brother or sister, a descendant of the donor's brother or sister, or the donor's uncle or aunt by blood, the rate of tax is the percentage set in the following table for each one hundred dollars ($100.00), or fraction thereof, of value of the gift:
    Value of Gift	    Rate
First $5,000	  3%
Over $5,000 and to $10,000	  4%
Over $10,000 and to $25,000	  6 %
Over $25,000 and to $50,000	  7 %
Over $50,000 and to $100,000	  8 %
Over $100,000 and to $250,000	 10 %
Over $250,000 and to $500,000	 11 %
Over $500,000 and to $1,000,000	 12 %
Over $1,000,000 and to $1,500,000	 13 %
Over $1,500,000 and to $2,000,000	 14 %
Over $2,000,000 and to $3,000,000	 15 %
Over $3,000,000	 16 %.
(3)	For a donee who is not described in subdivisions (1) or (2) of this subsection, the rate of tax is the percentage set in the following table for each one hundred dollars ($100.00), or fraction thereof, of value of the gift:
    Value of Gift	   Rate
First $5,000	  4%
Over $5,000 and to $10,000	  6%
Over $10,000 and to $25,000	  8%
Over $25,000 and to $50,000	 10 %
Over $50,000 and to $100,000	 11 %
Over $100,000 and to $250,000	 12 %
Over $250,000 and to $500,000	 13 %
Over $500,000 and to $1,000,000	 14 %
Over $1,000,000 and to $1,500,000	 15 %
Over $1,500,000 and to $2,500,000	 16 %
Over $2,500,000	 17 %."
Sec. 5.  G.S. 105-3 is amended by adding a new subdivision to read:
"(11)	Property transferred to another when the transfer of the property is exempt from federal estate and gift taxes under § 2056(b)(7) of the Code because it is considered qualified terminable interest property."
Sec. 6.  G.S. 105-188 is amended by adding a new subsection to read:
"( j)	The tax does not apply to property transferred to another when the transfer of the property is exempt from federal estate and gift taxes under § 2523(f) of the Code because it is considered qualified terminable interest property."
Sec. 7.  G.S. 105-2(a) reads as rewritten:
"(a)	A tax shall be and is hereby imposed upon the transfer of any property, real or personal, or of any interest therein or income therefrom, in trust or otherwise, to persons or corporations, in the following cases:
	(1)	When the transfer is from a person who dies seized of the property while a resident of the State and it is made:
a.	By will or by intestacy;
b.	Pursuant to a final judgment entered in a proceeding to caveat a will; or 
c.	Pursuant to a settlement agreement, to which the personal representative is a party, that, in the determination of the Secretary of Revenue in his sole discretion based on evidence presented by the personal representative, reflects the good faith, arm's-length compromise of an actual dispute between beneficiaries, heirs, or personal representatives and does not have the primary purpose of avoiding inheritance tax.
(2)	When the transfer is by will or intestate laws of this or any other state of real property or goods, wares, and merchandise within this State, or of any property, real, personal, or mixed, tangible or intangible, over which the State of North Carolina has a taxing jurisdiction, including State and municipal bonds, and the decedent was a resident of the State at the time of death; when the transfer is of real property or tangible personal property within the State, or intangible personal property that has acquired a situs in this State, and the decedent was a nonresident of the State at the time of death.
	(3)	When the transfer of property made by a resident, or nonresident, is of real property within this State, or of goods, wares and merchandise within this State, or of any other property, real, personal, or mixed, tangible or intangible, over which the State of North Carolina has taxing jurisdiction, including State and municipal bonds, by deed, grant, bargain, sale, or gift made in contemplation of the death of the grantor, vendor, or donor, or intended to take effect in possession or enjoyment at or after such death, including a transfer under which the transferor has retained for his life or any period not ending before his death (i) the possession or enjoyment of, or the income from, the property or (ii) the right to designate the persons who shall possess or enjoy the property or the income therefrom. The aggregate value exceeding ten thousand dollars ($10,000) of transfers to any one donee within a tax year by deed, grant, bargain, sale, gift, or combination thereof, made within three years prior to the death of the grantor, vendor, or donor, without an adequate valuable consideration, shall be presumed, subject to rebuttal, to have been made in contemplation of death within the meaning of this section; the first ten thousand dollars ($10,000) in value shall be deemed not made in contemplation of death.
	(4)	When any person or corporation comes into possession or enjoyment, by a transfer from a resident, or from a nonresident decedent when such nonresident decedent's property consists of real property within this State or tangible personal property within the State, or intangible personal property that has acquired a situs in this State, of an estate in expectancy of any kind or character which is contingent or defeasible, transferred by any instrument taking effect after March 24, 1939.
	(5)	a.	For purposes of this Article, the term "general power of appointment" means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate; except that:
		1.	A power to consume, invade or appropriate property for the benefit of the decedent which is limited by an ascertainable standard relating to the health, education, support or maintenance of the decedent shall not be deemed a general power of appointment.
	2.	A power of appointment which is exercisable by the decedent only in conjunction with another person:
I.	If the power is not exercisable by the decedent except in conjunction with the creator of the power, such power shall not be deemed a general power of appointment.
II.	If the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property, subject to the power, which is adverse to exercise of the power in favor of the decedent, such power shall not be deemed a general power of appointment. For the purposes of this clause a person who, after the death of the decedent, may be possessed of a power of appointment (with respect to the property subject to the decedent's power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power.
III.	If (after the application of clauses I and II) the power is a general power of appointment and is exercisable in favor of such other person, such power shall be deemed a general power of appointment only in respect of a fractional part of the property subject to such power, such part to be determined by dividing the value of such property by the number of such persons (including the decedent) in favor of whom such power is exercisable.
IV.	For purposes of clauses II and III, a power shall be deemed to be exercisable in favor of a person if it is exercisable in favor of such person, his estate, his creditors, or the creditors of his estate.
b.	Whenever any person shall have a general power of appointment with respect to any interest in property, such person shall, for the purposes of this Article, be deemed the owner of such interest and accordingly:
		1.	If in connection with any transfer of property taxable under this Article the transferor shall give to any person a general power of appointment with respect to any interest in such property, the transferor shall be deemed to have given such interest in such property to such person.
		2.	If any person holding a general power of appointment with respect to any interest in property shall exercise such power in favor of any other person or persons, either by will or by an appointment made in contemplation of the death of such person, or by an appointment intended to take effect in possession or enjoyment at or after such death, he shall be deemed to have made a transfer of such interest to such person or persons.
		3.	If any person holding a general power of appointment with respect to any interest in property shall relinquish such power by any action taken in contemplation of death or intended to take effect at or after his death, or shall die without fully exercising such power, he shall be deemed, to the extent of such relinquishment or nonexercise, to have made a transfer of such interest to the person or persons who shall benefit thereby.
	(6)	Neither the exercise nor the relinquishment of a special power of appointment (which shall mean any power other than a general power) with respect to an interest in property shall be deemed to constitute a transfer of such interest within the meaning of this Article. If in connection with any transfer taxable under this Article the transferor shall give to any person a special power of appointment with respect to any interest in property, he shall be deemed, for the purpose of computing the tax applicable thereto, to have given such interest in equal shares to those persons, not more than two, among the possible appointees and takers in default of appointment whom the transferor's executor or administrator may designate as transferees in the inheritance tax return, except that:
		a.	If a gift tax return is filed with respect to such transfer, the persons designated therein shall also be designated in the inheritance tax return, and
		b.	The tax shall be computed according to the relationship of the donee of the power to the persons designated if the possible appointees and takers in default of appointment include any persons more closely related to the donee of the power than to the donor, and if such computation would produce a higher tax.
(7),	(7a) Repealed by Session Laws, 1985, c. 656, s. 1.
	(8)	Where the proceeds of life insurance policies are payable as provided in G.S. 105-13.
	(9)	Whenever any person or corporation comes into possession or enjoyment of any real or personal property, including bonds of the United States and bonds of a state or subdivision or agency thereof, at or after the death of an individual and by reason of said individual's having entered into a contract or other arrangement with the United States, a state or any person or corporation to pay, transfer or deliver said real or personal property, including bonds of the United States and bonds of a state, to the person or corporation receiving the same, whether said person or corporation is named in the contract or other arrangement or not: Provided, that no tax shall be due or collected on that portion of the real or personal property received under the conditions outlined herein which the person or corporation receiving the same purchased or otherwise acquired by funds or property of the person or corporation receiving the same, or had acquired by a completed inter vivos gift.
		Nothing in subdivision (9) shall apply to the proceeds of life insurance policies.
(10)	Upon the death of a decedent who had a qualifying income interest for life in qualified terminable interest property whose previous transfer was exempt from inheritance or gift taxes under G.S. 105-3(11) or G.S. 105-188(j), the qualified terminable interest property that was previously exempt is considered to pass from the decedent to the person who is entitled to the property upon the termination of the decedent's qualifying income interest for life.  This subdivision does not apply to an interest in qualified terminable interest property that the decedent transferred to another and was not part of the decedent's qualifying income interest for life.
However, nothing in this Article shall be construed as imposing a tax upon any transfer of intangibles not having a commercial or business situs in this State, by a person, or by reason of the death of a person, who was not a resident of this State at the time of his death, and, if held or transferred in trust, such intangibles shall not be deemed to have a commercial or business situs in this State merely because the trustee is a resident or, if a corporation, is doing business in this State, unless the same be employed in or held or used in connection with some business carried on in whole or in part in this State."
Sec. 8.  G.S. 105-9(8) reads as rewritten:
"(8)	Costs of administration not claimed as a deduction on the federal income tax return filed under the Code by the fiduciary for the decedent's estate.  Costs of administration include reasonable attorneys' fees."
Sec. 9.  G.S. 105-29 reads as rewritten:
"§ 105-29. Uniform valuation.
		When filing an inheritance tax return, the personal representative of an estate must report as the value of the estate the value that is reported on an estate tax return filed for the estate under the Code.  If the federal government does not correct or otherwise determine the value of an estate reported on an estate tax return, the Secretary may determine the value based on evidence of any kind that becomes available to the Secretary from any source.
If the federal government corrects or otherwise determines the value of an estate reported on an estate tax return, the personal representative must, within two years after being notified of the correction or final determination by the federal government, file an inheritance tax return with the Secretary reflecting the corrected or determined value.  The Secretary must adopt the value as corrected or determined by the federal government for federal estate tax purposes.  The Secretary shall assess and collect any additional tax due on the transfer of property in the estate as provided in Article 9 of this Chapter and shall refund any overpayment of tax as provided in Article 9 of this Chapter.  A personal representative who fails to report a federal correction or determination is subject to the penalties in G.S. 105-236 and forfeits the right of the estate to any refund due by reason of the determination."
Sec. 10.  G.S. 105-241.1(e) reads as rewritten:
"(e)	Statute of Limitations. – The Secretary may propose an assessment of tax due from a taxpayer at any time if (i) the taxpayer did not file a proper application for a license or did not file a return, (ii) the taxpayer filed a false or fraudulent application or return, or (iii) the taxpayer attempted in any manner to fraudulently evade or defeat the tax.  If a taxpayer files a return reflecting a federal determination as provided in G.S. 105-29, 105-130.20, 105-159, 105-160.8, 105-163.6A, or 105-197.1, the Secretary must propose an assessment of any tax due within one year after the return is filed or within three years of when the original return was filed or due to be filed, whichever is later.  If there is a federal determination and the taxpayer does not file the required return, the Secretary must propose an assessment of any tax due within three years after the date the Secretary received the final report of the federal determination.  If a taxpayer forfeits a tax credit pursuant to G.S. 105-163.014, the Secretary must assess any tax or additional tax due as a result of the forfeiture within three years after the date of the forfeiture.  In all other cases, the Secretary must propose an assessment of any tax due from a taxpayer within three years after the date the taxpayer filed an application for a license or a return or the date the application or return was required by law to be filed, whichever is later.  If the Secretary proposes an assessment of tax within the time provided in this section, the final assessment of the tax is timely.
A taxpayer may make a written waiver of any of the limitations of time set out in this subsection, for either a definite or an indefinite time.  If the Secretary accepts the taxpayer's waiver, the Secretary may propose an assessment at any time within the time extended by the waiver."
Sec. 11.  Sections 1 through 7 of this act and this section are effective upon ratification and apply to the estates of decedents dying on or after January 1, 1995, and to gifts made on or after January 1, 1995.  Sections 8 through 10 of this act become effective July 1, 1995.  Section 8 applies to the estates of decedents dying on or after that date.  Sections 9 and 10  apply to assessments of taxes for which the statute of limitations had not expired on or before July 1, 1995.