If my parent gifts me the surplus funds, do they have to file a gift tax return? – North Carolina

Short Answer

North Carolina does not have a separate state gift tax return in the way many people mean “gift tax return.” If a parent receives foreclosure surplus funds and then gives some or all of that money to an adult child, the filing question is usually a federal one: whether the parent must file IRS Form 709 for that year. In general, a federal gift tax return is required when gifts to one person exceed the annual exclusion amount for the year, or when certain special gift rules apply.

Understanding the Problem

In North Carolina surplus funds cases, a common question is whether a parent who is entitled to foreclosure surplus funds can simply give those funds to an adult child, and whether that transfer triggers a “gift tax return.” The decision point is whether the transfer is treated as a gift by the parent after the parent becomes the person legally entitled to the surplus, and whether the amount and structure of that gift creates a federal filing requirement. The question also comes up when the court file lists “unknown heirs,” and the family wants a clean path to payment and then to share the funds within the family.

Apply the Law

In North Carolina, foreclosure surplus funds are typically paid to the person legally entitled to them, and when entitlement is unclear (including when the former owner is deceased), the surplus may be paid into the Clerk of Superior Court and decided through a special proceeding. Once the Clerk (or the court, if factual disputes arise) determines who is entitled to the surplus, that person can receive the funds. A later transfer from that person to someone else is usually treated as a separate transaction (often a gift), and gift-tax-return rules are generally federal rather than North Carolina-specific.

Key Requirements

Entitlement first: The parent generally must be recognized as the person legally entitled to the surplus funds (by agreement of all claimants or by a Clerk/court decision) before treating a later transfer as the parent’s “gift.”
Separate transfer: A gift is typically analyzed as a separate step that happens after the parent owns/controls the money, not as part of the foreclosure surplus distribution itself.
Federal filing trigger: Whether a gift tax return is required usually depends on federal thresholds and rules (commonly tied to the annual exclusion and how the gift is structured), not on a North Carolina gift tax return.

What the Statutes Say

N.C. Gen. Stat. § 45-21.31 (Disposition of proceeds of sale; payment of surplus to clerk) – Explains how foreclosure sale proceeds are applied and when surplus is paid to the Clerk of Superior Court if the person entitled is unknown or in doubt (including when the owner is deceased without an acting personal representative).
N.C. Gen. Stat. § 45-21.32 (Special proceeding to determine ownership of surplus) – Allows a special proceeding before the Clerk of Superior Court to determine who is entitled to surplus funds paid into the clerk’s office.

Analysis

Apply the Rule to the Facts: Here, the surplus funds appear tied to a foreclosure sale of a deceased relative’s home in North Carolina, and the court file lists “unknown heirs.” If the parent is the next-of-kin/heir under North Carolina intestacy rules, the parent typically must first establish entitlement to the surplus through the Clerk of Superior Court process when the trustee is unsure who should be paid. After the parent is determined to be the person entitled to receive the surplus, a later transfer from the parent to the child is usually treated as a separate gift, and any gift tax return question is generally a federal Form 709 issue rather than a North Carolina filing.

Process & Timing

Who files: A person claiming the surplus funds (often an heir, or an estate representative if one exists). Where: The Clerk of Superior Court in the county where the foreclosure sale occurred. What: A special proceeding to determine who is entitled to the surplus funds when entitlement is unclear or disputed. When: Typically after the surplus has been paid into the clerk’s office because the trustee could not safely pay it to a specific person.
If other claimants exist (including “unknown heirs”), they may need to be included as parties, and the Clerk may set a hearing. If someone files an answer raising factual disputes about ownership, the matter can be transferred for trial in Superior Court.
After the Clerk/court determines entitlement, the Clerk can authorize disbursement of the funds to the person(s) entitled. Only after that step does it usually make sense to evaluate whether a later family transfer is a “gift” that triggers a federal filing requirement.

Exceptions & Pitfalls

Skipping the entitlement step: Trying to “gift” money that has not yet been awarded/paid to the parent can create confusion, because the Clerk’s job is to pay the person legally entitled to the surplus—not to follow private family arrangements.
Unknown heirs and service issues: When the file lists “unknown heirs,” the process may require bringing in additional parties and following court-approved notice steps. Missing a required party or notice step can delay payment.
Tax labeling mistakes: People often call it “gift tax” when they really mean “gift tax return.” Even when no tax is owed, a federal return can still be required depending on the amount and structure of the gift. A tax attorney or CPA should be consulted for the federal filing analysis.

Conclusion

In North Carolina, the key step is first establishing that the parent is the person legally entitled to receive the foreclosure surplus funds through the Clerk of Superior Court process when heirs are listed as unknown. After the parent receives the funds, a transfer to an adult child is usually treated as a separate gift, and any “gift tax return” requirement is typically a federal Form 709 question rather than a North Carolina filing. The next step is to file the special proceeding with the Clerk of Superior Court to determine ownership of the surplus.

Talk to a Surplus Funds Attorney

If a family is dealing with foreclosure surplus funds for a deceased owner and the court file lists “unknown heirs,” our firm has experienced attorneys who can help clarify the Clerk of Superior Court process, required parties/notice, and the paperwork needed to get funds released. 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.