by: Leigh Griffith, Richard Johnson, Mike Yopp, and Aaron Flinn | Tax Group
On Monday, May 21, 2012, the Governor signed into law bills repealing the Tennessee gift tax, as of January 1, 2012, and phasing out the Tennessee inheritance tax by 2016. The inheritance tax exemption goes from its present amount of $1,000,000 to $1,250,000 in 2013, $2,000,000 in 2014, $5,000,000 in 2015; thereafter, beginning in 2016 the inheritance tax completely disappears.
Tennessee Gift Tax
Up until now, Tennessee has had a complex gift tax law with gifts divided into two categories, Class A and Class B, depending on the relationship of the recipient to the donor. The maximum tax rate for Class A gifts was 9.5% and 16% for Class B gifts. In addition, while the annual exclusion for Class A gifts mirrored the federal exclusion, Class B gifts did not and were a trap for the unwary. The recently passed legislation provides that “no tax shall be imposed upon the transfer by gift made by any person on or after January 1, 2012” with a proviso that this provision does not absolve any taxpayer of liability for any tax duly imposed during any tax year that began prior to January 1, 2012.
Interface with Federal Tax Planning Prior to the Sunset of the $5 Million Federal Estate and Gift Tax Exemption
Those in a position to do so can take advantage of current federal laws which are due to expire at the end of 2012, such as the $5.1 million lifetime gift tax exemption and the $5.1 million generation-skipping transfer tax exemption, both of which will drop to $1 million beginning in 2013 absent further Congressional action. This is a significant gift and estate planning opportunity for those who can take advantage of it and can be used in conjunction with other strategies to minimize the potential 55% future federal estate tax impact.
Additionally, as with any gift, you should consider the benefits of making gifts to individuals via a trust for their benefit rather than directly to the individual since a beneficiary’s interest in a trust, as well as the trust assets themselves, is protected from the claims of any creditors and is not potentially subject to division in the event the beneficiary and their spouse should divorce. Thus, by making a gift to a trust, not only are you able to confer the beneficial enjoyment of the gift but you also provide the beneficiary with creditor protection. Moreover, combing the use of a trust with other estate planning techniques, such as a FLP or FLLC, is a very powerful and effective estate planning tool.
Should you have any questions about the pending Tennessee legislation, estate planning (including the federal and Tennessee gift tax systems, trusts and limited liability entities) and the importance of exploring your options in 2012, please do not hesitate to contact Leigh Griffith, Richard Johnson, Mike Yopp, or Aaron Flinn.
WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT ANY STATEMENTS CONTAINED HEREIN ARE NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY YOU OR ANY OTHER TAXPAYER, FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW.