By Olen M. "Mac" Bailey, Jr.

(This article first appeared in the March 2002 issue of The Best Times, a senior newspaper published monthly in Memphis, Tennessee.)

For U.S. citizens, the federal Estate Tax may be dead. However, for Tennessee residents, the state Inheritance Tax appears to have a long life yet to live.

U.S. Estate Tax Repeal Revisited

In May 2001, the federal government passed a new law to repeal the Estate Tax by 2010 - sort of. Actually, the new law gradually decreases the U.S. Estate Tax Rates (from 55% to 45%) and increases the U.S. Estate Tax Exemption Amounts (the amount a person can leave to family or friends at death with NO estate tax)for years 2002 to 2009. The Estate Tax is completely repealed in 2010. However, the Estate Tax is reinstated in 2011, unless the then elected Senate, House and President agree to the repeal again. Sound complicated? Yes it is, and the State of Tennessee is not simplifying the matter any.

The Tennessee Inheritance Tax Shattered "Mirror"

Usually, the states follow the lead of the federal government in the area of Estate Taxes. Tennessee has mostly done so in the past. In 1998, when the federal government increased the Exemption Amount from $600,000 to $625,000, the state of Tennessee increased the Tennessee inheritance tax exemption amount as well. In other words, Tennessee mirrored the federal government changes. This "mirroring" simplified the "death" tax. Therefore, if a deceased person's estate was exempt from U.S. Estate Taxes, then the deceased person's estate was also exempt from Tennessee Inheritance Taxes.

Apparently, Tennessee will NOT mirror the new estate tax law passed by the federal government in 2001. Tennessee legislators have informed this author - "NO WAY, NO HOW." Why not? I imagine you can guess - MONEY. The State of Tennessee is experiencing a revenue problem - it is spending more than it collects. In short, Tennessee can't afford to mirror the new federal estate tax changes. Decreased inheritance tax rates and increased exemption amounts would result in less revenues and a greater deficit. In other words, the Tennessee tax debacle will now impact you even when you are dead.

The TAXABLE GAP

The differing Federal Estate Tax Exemptions and Tennessee Inheritance Tax Exemptions has created a TAXABLE GAP. In other words, the estate of a deceased Tennessee resident may owe no Federal Estate Tax, but may still owe Tennessee Inheritance Taxes. For example, an unmarried person with a $2,000,000 estate who dies in 2007 would owe no federal estate tax, but would owe $83,400.00 in Tennessee inheritance tax.

The GAP TAX for Married Couples

Most married couples with a taxable estate (more than a $2,000,000 in 2007) prepare their estate plan so that NO "death" taxes are due until both spouses are deceased. Unfortunately, if you are married and you have prepared your estate plan in this way, then the Tennessee Inheritance Tax GAP probably just changed your estate plan and you didn't even know it. How? Most estate planning documents such as your Wills and Revocable "Living" Trusts are based on federal estate tax law. In other words, the formulas used by attorneys to save on estate taxes utilize the federal estate tax Exemption Amounts, not the state inheritance tax exemption amounts. As a result, many estate tax plans for married couples in Tennessee will NOW result in a Tennessee Inheritance Tax when the FIRST SPOUSE DIES. For example, if the first spouse dies in 2007, then the surviving spouse may owe as much as $83,400.00 in Tennessee inheritance tax. As a greater example, if the first spouse dies in 2009, then the surviving spouse may owe as much as $225,900.00 in Tennessee inheritance tax, if the taxable estate is $3,500,000 or more. This may be a surprise to some surviving spouses who were originally reassured that no taxes would be due until both husband and wife were deceased. To avoid this possible surprise, married couples with a taxable estate need to update their estate plan to address the Tennessee Inheritance Tax GAP.

In the past, most estate planning was designed to save the kids from paying estate taxes. In this case, an updated estate plan may actually save mom or dad from paying a "death" tax. Contact your local estate planning attorney for help today.