Estate Planning Tax Considerations

The tax considerations of your estate plan are no small matter. The primary objective of good estate planning is to make sure your estate plan fully benefits the people and organizations you care for. Part of an effective estate plan typically involves minimizing the Tennessee inheritance taxes and federal estate taxes owed, so your property is preserved for the benefit of your heirs.

Unlimited Marital Deduction

If estate assets pass to a surviving spouse (or to a certain tax-savings trust for a surviving spouse), then the estate –  for federal estate tax purposes –  may take a marital deduction for the value of those assets, which will either reduce or eliminate the estate tax owed. Assets owned by a Tennessee resident which pass at death to someone other than a surviving spouse or qualified charitable organization are subject to federal estate tax.

Tennessee Inheritance Tax

In 2012 Tennessee enacted a law which will phase out the Tennessee inheritance tax, effective January 1, 2016. For decedents who die prior to 2016, if the value of their estate (after the marital deduction and any other applicable deductions) exceeds the allowable exemption amount ($2,000,000 for 2014; $5,000,000 for 2015), there will be Tennessee inheritance tax to pay. The Tennessee inheritance tax rate is a progressive rate ranging from 5.5% to 9.5% applied against the value of the estate exceeding the allowable exemption amount. The tax is due within nine months after the decedent’s date of death.

Federal Gift & Estate Taxes

In 2013 President Obama signed into law the American Taxpayer Relief Act of 2012 (the “Act”) which extends and makes permanent the estate and gift tax provisions enacted in 2001 and 2010. The estate and gift-tax provisions of the Act are generally favorable to taxpayers. Below is a summary of the Act’s key changes and how the Act impacts Tennessee residents from an estate-planning perspective.

$5.45 Million Federal Exclusion Amount; 40% Tax Rate

The Act makes permanent the federal estate tax and sets the exemption at $5,450,000 ($10,900,000 for married couples) in 2016 and increases the maximum tax rate from 35% to 40%.


The Act also makes permanent “portability” between spouses, meaning any exemption amount not used by a predeceased spouse may be added to the exemption amount for the surviving spouse. However, if a surviving spouse remarries, portability of the predeceased spouse’s unused exemption may be lost. Given this limitation and the fact that Tennessee does not recognize portability for Tennessee inheritance tax purposes, we are continuing to advise many clients to use estate plans that incorporate credit shelter trusts.

Gift Taxes

Under the Act the estate and gift tax regimes are to remain unified allowing individuals to use the full $5.45 million exemption to make lifetime gifts with no federal gift taxes. For lifetime gifts exceeding $5.45 million, the federal gift tax rate is 40%. For 2016, the annual gift exclusion is $14,000 per donee (married couples may continue to “split” their gift and may make combined gifts of $28,000 to each donee).

Generation Skipping Transfer (GST) Tax

The Act makes permanent a $5,450,000 GST tax exemption in 2016 and GST tax rate of 40%. The Act also makes permanent certain technical provisions under prior law affecting the GST tax.