Paying Estate Taxes

Have some estate taxes to pay? We’ve put together this short list of Tennessee estate taxes that need to be considered whenever paying your estate taxes.

Tennessee Inheritance Tax

In 2012 Tennessee enacted a law which phased out the Tennessee inheritance tax effective January 1, 2016. For decedent’s who die prior to 2016 a Tennessee inheritance tax return is due nine months from the decedent’s date of death and any Tennessee inheritance tax must be paid. This tax return must be filed regardless of the size or value of the estate. If any estate assets pass to a surviving spouse (or to a certain tax-savings trust for a surviving spouse), then the estate may take a marital deduction for the value of those assets, which will either reduce or eliminate the inheritance tax owed.

If the value of the 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. This should amount to somewhere between 5.5% and 9.5% of the value of the assets which exceed the allowable exemption amount. If a Williamson County resident dies in 2014 and the total value of the estate (after all deductions) equals $2,100,000, then Tennessee inheritance tax would be imposed on only $100,000 in assets (the difference between $2,100,000 and the 2014 exemption amount of $2,000,000) and not the total $2,100,000.

Federal Estate Tax

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 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.

The Act reinstates and makes permanent the federal estate tax and sets the exemption at $5,450,000 million and the tax rate at 40% for decedents dying in 2016. Each subsequent year the exemption amount is set to increase slightly to account for inflation. The Act also provides for “portability” between spouses, meaning any exemption amount not used by a predeceased spouse may be added to the exemption amount for the surviving spouse. If a surviving spouse remarries, portability of the predeceased spouse’s unused exemption may be lost. Your attorney and tax advisors should play an important role in advising you on the estate’s federal estate tax obligations and the preparation and filing of the return itself.

Income Tax Returns

The personal representative (or your accountant) is responsible for preparing the decedent’s final federal income tax return (Form 1040). If the decedent was married at the time of death the final income tax return will probably be a joint return with the decedent’s spouse. It may be necessary for a fiduciary income tax return (Form 1041) to be filed for the estate if the probate assets produce sufficient interest, dividends, rents, or other income while the estate is open. Consult your accountant to determine whether any fiduciary income tax returns must be filed.