What are the tax implications of transferring property into an irrevocable trust? – North Carolina

Short Answer

In North Carolina, funding an irrevocable trust is often a completed gift for federal transfer tax purposes, which can require filing a federal gift tax return and locks in a carryover income tax basis (no step-up at your death unless the assets are later included in your taxable estate). For income taxes, a nongrantor irrevocable trust is its own taxpayer; North Carolina taxes undistributed trust income only to the extent tied to North Carolina residents or North Carolina-source income. Recording a deed to fund the trust can also involve county recording fees and transfer taxes.

Understanding the Problem

In North Carolina, you want to know: if I (the settlor) transfer my home or investments into an irrevocable trust for asset protection and estate planning, what taxes do I trigger, and who files them, when? One salient fact: your goal is asset protection, so we must consider whether the transfer is a completed gift and how that affects gift, income, and future estate tax treatment.

Apply the Law

Under North Carolina law and federal rules that apply to trusts, an irrevocable trust can be treated as either a grantor trust (you pay the trust’s income tax) or a nongrantor trust (the trust is its own taxpayer). A transfer that is a completed gift usually requires an IRS Form 709 and fixes a carryover basis in the trust’s hands. North Carolina has no state estate or inheritance tax for recent years, but it does tax undistributed trust income in limited circumstances. Real estate deed recordings involve county-level transfer taxes and fees. The main forums are the IRS (gift and income tax filings) and the North Carolina Department of Revenue (trust income tax). Core deadlines typically include April 15 for federal gift and fiduciary income tax returns, with corresponding North Carolina deadlines for trust returns.

Key Requirements

• Completed gift treatment: If you give up control/benefits, the transfer to an irrevocable trust is generally a completed gift, often requiring IRS Form 709 and using lifetime exclusion.
• Basis and step-up: The trust takes your carryover basis; there is no step-up at your death unless the assets remain includible in your taxable estate (for example, due to retained powers).
• Grantor vs. nongrantor status: If you retain certain powers, you may be taxed on trust income; otherwise, the trust files its own returns and pays tax on undistributed income.
• North Carolina income tax: NC taxes undistributed trust income to the extent it is for NC residents or comes from NC sources; distributions shift income to beneficiaries.
• Deed recording and transfer costs: Transferring NC real property to the trustee requires a recorded deed and payment of county recording fees and applicable transfer/excise taxes.

What the Statutes Say

• North Carolina Gen. Stat. § 105-160.2 (Taxation of trusts and estates) – NC taxes undistributed trust income tied to NC residents or NC sources.
• North Carolina Gen. Stat. § 36C-1-103 (Trust definitions) – Defines settlor, trustee, and beneficiary for trust administration.

Analysis

Apply the Rule to the Facts: Because your goal is asset protection, you will likely avoid retaining powers that could undermine that goal; doing so usually makes the transfer a completed gift that requires IRS Form 709 and sets carryover basis for the trust. If the trust is structured as a nongrantor trust, it will need its own EIN and will pay income tax on undistributed income; NC will tax only the portion tied to NC residents or NC-source income. If you deed NC real property into the trust, expect recording and transfer costs at the Register of Deeds.

Process & Timing

1. Who files: You (the donor). Where: IRS. What: IRS Form 709 (United States Gift Tax Return). When: Due by April 15 of the year after the transfer; extensions available with an income tax extension.
2. Who files: Trustee. Where: IRS and NCDOR. What: Obtain EIN (IRS), file Form 1041 (federal) and Form D-407 (North Carolina fiduciary return) if nongrantor with income. When: Generally due by the 15th day of the 4th month after the trust’s year-end (often April 15); extensions available.
3. Who records: You or closing professional. Where: County Register of Deeds. What: Deed transferring title to the trustee; pay transfer/excise tax and recording fees. When: At funding; timing varies by county processing.

Exceptions & Pitfalls

• Retained powers can make the gift incomplete, keep assets in your taxable estate, or cause grantor-trust income taxation.
• Carryover basis means built-in gains carry into the trust; you may lose a future step-up if assets are excluded from your estate.
• NC trust income tax reaches only certain undistributed income; beneficiary location and source of income matter.
• Real estate transfers require accurate deed preparation, trustee capacity language, and payment of county transfer/recording costs.
• Procedures and tax thresholds change; verify current federal exclusion amounts and filing thresholds before you file.

Talk to a Estate Planning Attorney

If you’re dealing with how taxes apply when moving assets into an irrevocable trust, our firm has experienced attorneys who can help you understand your options and timelines. Call us today at [919-341-7055].

Disclaimer: This article provides general information about North Carolina law based on the single question stated above. It is not legal advice for your specific situation and does not create an attorney-client relationship. Laws, procedures, and local practice can change and may vary by county. If you have a deadline, act promptly and speak with a licensed North Carolina attorney.