How to Retroactively Fix a Defective Will in Tennessee (Post Mortem Planning)
Estate plans for most Tennessee residents drafted prior to 2012 were structured to minimize Tennessee inheritance taxes and federal estate taxes. Since then, Tennessee’s death tax landscape has drastically changed and for many Tennesseans their estate plans may be outdated and potentially subject their heirs to unnecessary income tax exposure.
In 2012, Tennessee enacted a law abolishing the Tennessee inheritance tax effective January 1, 2016. On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the “Act”) which extends and effectively makes “permanent” certain estate and gift tax provisions which are generally favorable to taxpayers. The Act makes permanent the federal estate tax and set the exemption at $5,430,000 in 2015 and 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.
Currently, Tennesseans generally will not be subject to death taxes unless single with an estate value exceeding approximately $5M or married with a combined estate exceeding $10M. In other words, most Tennesseans do not have potentially taxable estates. According to the Tax Policy Center, it is estimated that only 60 taxable estates will be from Tennessee in 2016.
To give some perspective, ten years ago the federal estate tax exemption was $1.5M with a top tax rate of 47%. In 1997, it was $600K with a top tax rate of 55%. This is why, prior to the death tax law changes in 2012 and 2013, most Tennesseans whose estates approached or exceeded these lower exemption amounts structured their estate plans to include “bypass trust” to minimize death taxes.
While assets held in a bypass trust are not subject to death taxes, the children or other beneficiaries of a bypass trust, at the death of the second spouse, typically do not receive a step-up in cost basis in assets inherited from a bypass trust. Accordingly, for Tennesseans whose current estate plans implement bypass trust planning but whose combined gross estates are below the current exemptions of approximately $5M (single) or $10M (married), such bypass trust planning can cost the children or other remainder beneficiaries dearly in income taxes.
For those individuals who are still alive and competent, it is relatively easy to update their estate plan to account for the recent tax changes. However, some Tennesseans will undoubtedly fail to update their estate plans before they die. Fortunately, Tennessee law permits a probate court to retroactively modify the terms of a will to achieve a testator’s desire to minimize taxes so long as the modification is not contrary to the testator’s probable intention.
It is important to take into consideration the tax consequences of any such post mortem modification. Furthermore, it is important to obtain the advice of a Tennessee attorney focused in trusts and estates before seeking court approval to modify a will, as this could subject an executor to personal liability exposure if a beneficiary does not agree with the changes or is otherwise adversely affected.