How 99% ‘Legally’ Avoid the Tennessee Estate Tax

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Paul Sundin, CPA

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The great state of Tennessee has experienced a large influx of migration in recent years. But when people move to Tennessee, questions regarding taxes arise.

Does Tennessee have an estate tax? What about inheritance tax or gift tax? In this article, we will examine and answer these questions and set you on a straight path.

Tennessee estate tax

Tennessee is not impose an estate tax. This is great news for residence. In fact, it doesn’t matter the size of your estate, there will be no state level tax assessed. 

But don’t forget about the federal estate tax. Any amount in excess of the federal exemption will be subject to estate tax.

Federal state tax exemption

The estate tax is often referred to as the death tax. This is for good reason as it only applies once someone passes away.

However, if you taxpayers will find themselves subject to the estate tax. It will only impact about 1/2 of 1% of households. In addition, there is some tax planning strategies that you can do to mitigate any tax exposure.

The estate tax calculation is somewhat straightforward. However there are some complexities when it comes to valuations.

The first step is to itemize all assets. These include basic items like my household items, cars and boats. But the most significant items are real estate, stocks and bonds, retirement accounts, and also business interests.

defined benefit plan rules

Once valuations or appraisals have been obtained, the executor of the estate can then deduct mortgages or other debt and liabilities of the decedent. This can also include medical bills and credit card bills.

The last step in the calculation, is to deduct legal and professional fees. This includes appraisal costs, but also CPA fees and attorney fees.

Once debts and expenses have been deducted, the result is the Neddick state. Any amount that exceeds the federal estate exemption amount will be assessed attacks at 40%. There is discussion about raising the tax rate as well as reducing the exemption amount. So stay tuned.

Regardless of the size of an estate, the federal government imposes inheritance tax. In most cases, it is based on the value of the estate, and is paid by the beneficiaries or heirs of a deceased person.

Several countries have this tax, including Belgium, Denmark, France, Germany, Italy, Japan, the United Kingdom, and the United States. There are also states that do not levy this tax. For more information, visit the IRS website.

The tax rate depends on the state you live in. The higher the value of an estate, the higher the rate. Because there are different rates in each state, the amount of tax you pay will depend on your relationship to the deceased.

While there is no universal inheritance tax rate, most states follow a progressive scale. It is important to note that a higher rate of tax means a larger estate, which means that you should calculate the value of your assets accordingly.

Tennessee gift tax and inheritance tax

Did I mention that Tennessee is a rather tax friendly state? It has no inheritance tax nor does it have a gift tax. Even though this is good news, it’s not really that surprising. Only seven states impose and inheritance tax.

It is possible though for Tennessee residence to be subject to an inheritance tax in another state. For example, if a Tennessee resident receives in Heritance from someone who died in Pennsylvania they can possibly be subject to a Pennsylvania inheritance tax. It sounds counterintuitive, but states can impose their own rules and taxes.

How to Avoid (or Lower) the Tennessee Estate Tax

Since Tennessee does not have an estate tax, you don’t have much to worry about at the state level. But you still could get caught in the federal estate tax. There are many techniques that you can use to minimize tax issues. Make sure to address the following with your CPA:

  • Family Limited Partnerships (FLPs)
  • Direct Medical and Tuition Payments 
  • Gifts Below Annual Exemption
  • Donor-Advised Funds
  • Irrevocable Life Insurance Trust (ILIT)
  • Special Valuation of Farms and Businesses
  • Minor Trusts 
  • Charitable Remainder Trusts (CRUT)
  • Grantor Retained Income Trusts (GRIT)
  • Intentionally Defective Grantor Trust (IDGT)
  • Dynasty Trusts
  • Charitable Gift Annuity
  • Grantor Retained Unitrusts (GRUTs)
  • Qualified Terminable Interest Property (QTIP)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Grantor Retained Annuity Trusts (GRATs) 
  • Crummey Trusts 

Who should establish an estate plan?

While everybody should implement estate planning, there are specific groups that it is imperative. Surprisingly, many folks don’t understand that retirement plans and life insurance proceeds are included in a person’s estate.

People who have the following assets and circumstance should consider an estate plan:

  • Medical and healthcare professionals
  • People with multiple rental properties
  • Partners in passive activities
  • CPAs, engineers, IT professionals
  • People with life insurance policies of at least $1 million
  • Retirement accounts in excess of $1 million
  • People who stand to receive a large inheritance
  • Business owners and entrepreneurs
  • Consultants with significant earning potential

Tennessee tax structure

No inheritance taxIncome tax
No estate taxSales & Use tax
No gift taxProperty tax

Tennessee happens to be a tax friendly state. They do have a real estate tax, but most taxpayers will find that they’re not subject to the state income tax. Not a bad deal.

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