How Do Tennessee’s Estate Tax Laws Impact Your Inheritance and Legacy Planning?

May 11, 2024

Why is it Critical to Consider the Effect of Taxes as Part of Your Overall Estate Plan?

The purpose of creating a strong and well-considered estate plan is to safeguard the value of your estate and ensure the maximum benefit of your hard work is passed to your beneficiaries. Making certain your planning documents are in order can streamline the process of transferring assets and avoid unnecessary delays and expenses. Careful tax planning also plays a role in protecting your estate and loved ones from potentially hefty tax liabilities. While understanding Tennessee’s estate tax laws can be vital for all individuals, those with extensive assets, lucrative business interests, or high-value estates can often benefit the most from prudent tax-planning strategies. A skilled Nashville estate planning attorney can explain the implications of state and federal estate tax laws on your inheritance plans and discuss methods to mitigate their impact.

Does Tennessee Impose a State Estate Tax?

Estate taxes are paid on the taxable value of your estate at the time of your death, prior to the transfer of your assets. The taxable value is calculated by determining the total of your gross estate value and subtracting any applicable deductions or reductions, such as charitable donations, spousal property, and qualifying debts. Each state that charges an estate tax sets an exemption amount. Only high-value estates that exceed this amount will be subject to tax rates on all or part of the estate, depending upon the applicable laws. If estate taxes are owed, the executor must ensure the appropriate forms are prepared and taxes are paid before the remaining property is distributed to the beneficiaries. Fortunately for Tennessee residents, the state does not require estate taxes.

Inheritance taxes are similar to estate taxes but must be paid by the beneficiary on the value of the assets they inherited that exceed the state’s exemption amount. Your relationship to the deceased can also impact the amount of inheritance tax you must pay. Currently, only six states collect inheritance taxes:

Pennsylvania, New Jersey, Nebraska, Maryland, Kentucky, and Iowa. At one time, Tennessee had an inheritance tax for assets worth over five million dollars, but this law was repealed on January 1, 2016. The estates of Tennessee residents who died on or after this date are no longer subject to an inheritance tax.

It should be noted that inheritance taxes may be possible on out-of-state real estate situated in a location that enforces these taxes. Therefore, Tennessee residents with property in nearby Kentucky or other states should work closely with an estate planning attorney to determine their potential tax burden. By implementing careful tax planning strategies, you may be able to avoid costly and stressful surprises for your beneficiaries.

Could Your Estate Be Subject to Federal Estate Taxes?

While Tennessee does not have an estate or inheritance tax, residents must still consider the federal estate tax, which applies to estates exceeding certain monetary thresholds. For 2024, the federal estate tax exemption is $13,610,000 for individuals, and this exemption may increase in the coming years.

Estates valued under this amount are not subject to federal estate taxes, but larger estates are likely to face tax liabilities. Individuals with significant assets need to plan accordingly to protect their hard-earned wealth for future generations.

What Tax Planning Strategies Can You Implement to Reduce the Tax Burden on Your Estate?

With no state estate tax and the state inheritance tax repealed, Tennessee residents can focus on federal estate tax planning and ensuring a smooth transfer of assets to heirs. Some common strategies to meet these goals include:

• Gifting: Tennessee has no state gift tax, and the IRS allows individuals to give a certain amount each year without incurring gift taxes. Making systematic gifts to individuals during one’s lifetime can reduce the size of your estate, thus potentially reducing or eliminating your federal estate tax liabilities. For example, the annual exclusion per donee for 2024 is $18,000. Under the current rules, you can give assets to unlimited recipients without paying taxes, as long as the total value transferred to each donee during that calendar year is less than the exclusion amount.
• Charitable donations: Donating to charity can reduce the size of your taxable estate and provide a legacy of support to your cherished causes. Your estate planning attorney can assist with determining the most effective methods of donation for your finances, goals, and chosen charities. Options may include direct donations, charitable remainder trusts, charitable lead trusts, or starting your own foundation.
• Trusts: Establishing various types of trusts can help minimize estate taxes and ensure specific terms for asset distribution. For instance, by placing assets into an irrevocable trust, you can effectively remove them from your taxable estate, thereby decreasing or avoiding the estate tax burden for your beneficiaries. However, trusts are complex legal arrangements that should be undertaken with the assistance of legal and financial advisors to ensure your desired outcomes.

Why is Engaging in Early Inheritance and Legacy Planning Vital?

Many people delay estate planning until the later stages of their lives due to discomfort with the subject matter or a perceived lack of need for these important documents when they are still younger and healthy. However, proactive legacy planning with an experienced estate planning lawyer can be essential to safeguarding your loved ones’ inheritances. Beginning the process as early as possible allows you to take full advantage of all available tax planning strategies. It gives you the opportunity to create a robust plan that has the flexibility to grow with you through the years as your financial situation changes.

No matter where you are in your inheritance planning journey, our knowledgeable attorneys at Brighter Day Law can provide answers and personalized guidance to help you reach your unique goals. To schedule an evaluation session and learn how we can assist you, contact our Nashville law firm today by using our convenient online form or calling 615-437-8808.