While many states choose to levy taxes on its residents through a number of taxes after they die, many states are beginning to rethink this common practice. There are a number of states that are competing for wealthy retirees through incentives like certain estate tax breaks. Although a state can bring in large amounts of tax revenue through estate or inheritance taxes, states are beginning to recognize that more benefits can be had from cutting them rather than increasing them.
Last year, the Tennessee state legislature chose to cut taxes in an attempt to hold onto some of its wealthy retirees and in hopes of bringing in more from elsewhere. Lawmakers chose to phase out the state’s inheritance tax over a period of four years. Tennessee currently allows property inherited from the estate to be exempt from paying the tax if it is valued under a certain amount. If the value of the estate is over the exempted allowance, the tax rate ranges from 5.5% at the lower end to 9.5% at its highest end. The tax exemption increases incrementally each year until being completely eliminated in 2016. The tax exemption schedule is as follows:
- 2012 – $1,000,000
- 2013 – $1,250,000
- 2014 – $2,000,000
- 2015 – $5,000,000
- 2016 – Inheritance tax eliminated completely
While Tennessee labels its death tax as an “inheritance tax,” it operates as an estate tax. There are some slight differences in what an inheritance tax is and what an estate tax is. An inheritance tax is a tax that is based upon the privilege of inheriting property. The inheritance tax is paid by each beneficiary, or the person receiving the property. However, an estate tax is a tax that is based on the privilege of transferring wealth. The estate tax is paid by the estate of the decedent.
While Tennessee’s inheritance tax appears to make a considerable amount money for the state, state lawmakers believe that more can be made from completely eliminating the tax. In the 2010-2011 fiscal year, Tennessee’s estate tax brought in nearly $100 million. However, some experts believe that Tennessee’s estate tax is one of the biggest reasons why people don’t want to live in or move to Tennessee. Many of those same experts believe that by maintaining an estate or inheritance tax, the state is preventing many people from moving to Tennessee. By not offering the incentives of tax breaks, Tennessee would be missing out on the revenue that jobs, homes, and wealth that more residents can bring in. As a result, Tennessee lawmakers chose to scale back and then eliminate the inheritance tax in 2016 in hopes of increasing tax revenue for the state through other means.
It will be interesting to see whether the state is able to increase revenue through means other than an estate tax. However, Tennessee residents will be glad to know that beneficiaries will be able to receive more than what was previously possible. If you have any estate planning questions, contact our Tennessee estate planning lawyers at The Higgins Firm. Our Nashville based attorneys would be happy to answer any estate planning questions that you may have.