Tennessee Likely to Repeal Death and Gift Taxes

April 3, 2012

The Tennessee General Assembly appears ready to eliminate Tennessee’s inheritance tax (the so-called “Death Tax”) as well as its gift tax. The purpose of this dramatic legislation is to make Tennessee a more attractive state for economic growth and to prevent drivers of this growth from moving away from Tennessee to other states with more beneficial tax structures. The bills eliminating the taxes have not yet been presented to Governor Haslem, but it appears likely that they will be soon, and the Governor is expected to sign them.

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. In addition to being one of the minority of states with an inheritance 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 expected legislation will call for the complete repeal of Tennessee’s gift tax for gifts made on or after October 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, people were frequently surprised to find that they owed Tennessee gift tax on gifts that were free from federal gift tax.

If the new legislation is enacted as expected, it will eliminate concern about Tennessee’s gift tax this fall and gradually eliminate concern about Tennessee’s inheritance tax over the next four years. In the meantime, though, 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, anyone planning to make a gift this year would be wise to consider waiting until October to avoid this tax.

People should review their estate plans with their estate planning advisors to insure their plans take advantage of these significant changes in Tennessee’s tax laws and to insure that any prior planning does not produce unanticipated consequences as a result of these expected changes.