Tennessee Inheritance (Estate) Tax

If you live in Tennessee, you may know that your state imposes its own estate tax. But the tax is scheduled to go away by 2016.

How the Tax Will Be Phased Out

For deaths in 2013, estates with a value of up to $1.25 million are exempt from Tennessee estate tax. But legislation passed in 2012 gradually eliminates the Tennessee estate tax. (Tenn. HB 3760, SB 3762.) Every year, the exempt amount will increase, until 2016, when the tax is gone entirely. Here is how it will go:

• deaths in 2013: $1.25 million
• deaths in 2014: $2 million
• deaths in 2015: $5 million

Tennessee Terminology

What Tennessee calls an inheritance tax is really an estate tax—that is, a tax imposed only when the total value of an estate exceeds a certain value. Under current Tennessee law, the tax kicks in if your estate (all the property you own at your death) has a total value of more than $1.2 million.

The taxes that other states call inheritance taxes are not based on the total value of the estate. They are imposed on the people who inherit from you, and the tax rate depends on your family relationship. Close relatives are either exempt from tax or pay a very low rate, while more distant relatives or unrelated persons are taxed at a higher rate.

The state estate tax is separate from the federal estate tax. The federal tax affects only estates worth more than $5.25 million this year; the amount will be indexed for inflation in future years.

The Tennessee Filing Requirement

It’s the job of your executor to determine whether or not an estate tax return must be filed with the state. For deaths in 2013, if the gross estate of a Tennessee resident has a value of more than $1.25 million, the executor must file a state inheritance tax return.

Even if a return must be filed, it doesn’t mean the estate will owe tax. Deductions are taken from the gross estate (which is pretty much everything you own at death, as discussed below) to arrive at the taxable estate. If the taxable estate is lower than the estate tax exemption (currently $1.25 million), no tax will be due.

Common deductions include expenses such as funeral costs and attorneys’ fees. Also, assets you leave to your spouse are not taxed, regardless of amount. So if, for example, you leave all of your $3 million estate to your spouse, an estate tax return would have to be filed—but no tax would be due.

The estates of some nonresidents also have to file a Tennessee inheritance tax return. If a nonresident owned more than $1.2 million in assets physically in the state (real estate, for example), the estate will need to file a state inheritance tax return.

The Gross Estate

Your gross estate, for tax purposes, includes what you own as of your death:

• real estate in Tennessee
• bank accounts
• investment account
• vehicles
• proceeds from life insurance on your life, unless you transfer the policy more than three years before your death
• retirement account funds
• your business interests (sole proprietorship, limited liability company, or small corporation)
• assets held in a revocable living trust (or other trusts you control)

Some property that you don’t actually own at death may also be counted in your estate, for estate tax purposes. If you made taxable gifts (more than the annual federal gift tax exclusion amount, which is currently $14,000 per year per recipient), within three years of your death, then those gifts must be included in your gross estate. The amount of gift tax you paid, however, can be taken as a credit.

Paying the Tax

Your executor must file the Tennessee inheritance tax return, if one is required, nine months after the date of death (or apply for an extension). Any tax due must still be paid by the original deadline, or interest begins to accrue on the unpaid amount.

The Tennessee Department of Revenue website provides forms and information about the tax. But your executor will need to hire an experienced local lawyer or CPA to prepare the return. The fee can be paid from funds in the estate.