On April 27, 2012, the Tennessee General Assembly passed the bill eliminating Tennessee's inheritance tax (the so-called "Death Tax"), and on May 1, 2012, it also passed the bill eliminating Tennessee's gift tax. Governor Haslam is expected to sign both of these bills. This new legislation represents a dramatic shift in Tennessee's tax landscape and is intended to foster Tennessee's economic growth by removing the incentive for drivers of that growth to move to more tax-friendly states or to never move to Tennessee in the first place.
Tennessee Inheritance Tax. Under current law, Tennessee imposes an inheritance tax on the estates of all persons residing in Tennessee and on the estates of non-residents who own property in Tennessee. Every estate has a $1 million exemption. Estates in excess of $1 million are taxed on a graduated basis, with the tax on the first $440,000 being $30,200 and any excess over $1,440,000 being taxed at 9.5 percent.
The new legislation gradually repeals the inheritance tax over the next four years with complete repeal for persons dying in 2016 and thereafter. Prior to 2016, the exemption will increase to $1.25 million for persons dying in 2013, $2 million for persons dying in 2014 and $5 million for persons dying in 2015.
Tennessee Gift Tax. Tennessee is currently one of only two states with a gift tax. Unlike the inheritance tax, there is no $1 million exemption. Accordingly, the Tennessee gift tax generally applies to gifts in excess of $13,000.
The new legislation calls for complete repeal of Tennessee's gift tax retroactively for gifts made on or after January 1, 2012.
Estate Planning Considerations. As the federal estate tax exemption has increased over the past 10 years (it is currently $5,120,000 per person), fewer people have needed to worry about federal estate taxes. With an exemption of only $1 million per person, however, Tennesseans still needed to plan for the Tennessee inheritance tax. In addition, Tennessee's gift tax often prevented Tennesseans from taking full advantage of the exemptions available from the federal gift tax.
If Governor Haslam signs the new legislation as expected, it will eliminate concern about Tennessee’s gift tax and gradually eliminate concern about Tennessee's inheritance tax over the next four years. In the meantime, the gradual repeal of the inheritance tax over the next four years presents some interesting issues. In addition, many people have executed wills in recent years that establish trusts intended to deal specifically with the Tennessee inheritance tax. These trusts will not be needed after 2016. This should allow many people to simplify their estate plans.
Regarding gifts, with the current federal estate and gift tax laws scheduled to sunset on January 1, 2013, there could be a window from now until December 31, 2012 to take advantage of very favorable federal and state gift tax laws.
People should review their estate plans with their estate planning advisors to ensure their plans take advantage of these significant changes in Tennessee's tax laws and to ensure that any prior planning does not produce unanticipated consequences as a result of these expected changes.