Legislation passed by the Tennessee General Assembly within the past week has greatly changed the landscape of estate planning for state residents. In succession, both the state Senate and House of Representatives have passed a phase-out of the Tennessee inheritance tax and, surprisingly, a repeal of the Tennessee gift tax.
Inheritance Tax Phase-Out. A bill to phase out Tennessee's inheritance tax (the Inheritance Tax Phase-Out Bill), SB 3762/HB 3760, passed both chambers of the Tennessee General Assembly and will be sent to Governor Bill Haslam for his signature. The Inheritance Tax Phase-Out Bill gradually eliminates the state inheritance tax by increasing the exemption available to decedents' estates from $1 million through the end of tax year 2012 to $1.25 million for estates of decedents dying in 2013; to $2 million for estates of decedents dying in 2014; and $5 million for estates of decedents dying in 2015, until finally, no inheritance tax is to apply to estates of decedents dying on or after January 1, 2016.
Gift Tax Repeal. Legislation to repeal Tennessee's gift tax, SB 2777/HB 2840 (the Gift Tax Repeal Bill), also passed both chambers. The Gift Tax Repeal Bill was introduced late in the Legislative Session containing a January 1, 2013 effective date, then changed in the Senate Finance, Ways and Means Committee on April 27, 2012 to an October 1, 2012 effective date. The final version introduced in the House Finance, Ways and Means Committee on April 30, 2012, provided for a January 1, 2012 effective date. The Senate concurred with the May 1, 2012 House version of the effective date, so the final wording of the Gift Tax Repeal Bill to be sent to Governor Haslam eliminates the gift tax retroactive to January 1, 2012.
Tennessee residents were previously subject to gift tax on gifts over $13,000 to Class A donees (generally members of the donor's family) and on gifts over $3,000 to Class B donees (generally non-family members). For decades, the gift tax has applied on a graduated rate schedule ranging from 5.5 percent to 16 percent, depending on the size of the gift and the identity of the donee. Tennessee and Connecticut were the last two remaining states to impose a stand-alone gift tax on transfers made by state residents during their lifetimes. (Some states do impose state inheritance or estate tax on lifetime gifts made within three years of death or include lifetime gifts as part of the calculation of state inheritance or estate tax.)
Large Lifetime Gifts in 2012. Currently the federal estate, gift and generation-skipping transfer tax exemptions are unified at $5.12 million until the end of tax year 2012. That exemption offers a unique gifting opportunity for individuals to transfer $5.12 million worth of property without incurring federal gift or generation-skipping tax. The exemption amounts for all federal transfer taxes are currently scheduled to be reduced to $1 million effective January 1, 2013, and in this election year it is impossible to reliably predict whether the reduction scheduled for 2013 will be averted in whole or in part by legislative efforts. Additionally, even if the federal exemption amount remains relatively high, the trade-off may be the elimination of some currently available estate planning techniques, such as valuation discounts for closely held businesses.
Despite this gift-making opportunity in 2012, giving large sums of money or property outright may not be the most desirable way to structure a transfer in your particular situation. For example, using a generation-skipping trust generally prevents property from being taxed not only in your estate but also in the estates of your beneficiaries, and such an approach could be a more suitable estate plan for you.