On May 21, 2012, the Governor of Tennessee signed into law legislation that eliminates its gift tax and phases out its inheritance tax.
The legislation phases out the Tennessee inheritance tax by gradually increasing the state exemption amount (currently $1 million for 2012) through 2015, culminating with full repeal, as follows:
- $1.25 million exemption for individuals dying in 2013;
- $ 2 million exemption for individuals dying in 2014; and
- $ 5 million exemption for individuals dying in 2015.
The inheritance tax won’t apply to individuals dying in 2016 or thereafter.
The bill, as originally introduced, repealed the Tennessee gift tax beginning in 2013. However, pursuant to an amendment made on the eve of passage, the bill as enacted repeals the gift tax retroactively to Jan. 1, 2012. However, it doesn’t eliminate liability for taxes imposed during prior years.
Previously, Tennessee taxed gifts based on the relationship of the recipient to the donor. Gifts to “Class A” beneficiaries (including spouses, descendants and siblings) were taxed at a lower rate than gifts to “Class B” beneficiaries. Additionally, while there was an annual exclusion equal to the federal exclusion for gifts to Class A beneficiaries, gifts to Class B beneficiaries qualified for a reduced annual exclusion amount only.
The last-minute change to repeal the Tennessee gift tax retroactively to Jan. 1, 2012 presents a significant planning opportunity. With the enhanced federal estate and gift tax exemption of $5.12 million slated to sunset after this year, there might now be an opportunity to use the federal exemption amount without a state gift tax consequence.
Last Man Standing?
Before the recent passage of this legislation, Tennessee and Connecticut were the only remaining U.S. jurisdictions that imposed a separate state gift tax. Connecticut now has the dubious honor of being the only jurisdiction in the country that imposes a gift tax.
Interestingly, according to a Tennessee General Assembly Fiscal Review Committee Memorandum, the recurring decrease in state revenue as a result of repealing the state’s gift tax is estimated to be partially offset by increased taxpayer spending. Specifically, it’s estimated that 50 percent of the gift tax savings will be spent on other sales-taxable goods and services. A modest decrease in state expenditures is also estimated due to the anticipated elimination of several Department of Revenue audit positions, which were rendered unnecessary as a result of no longer having to administer the gift tax. Although secondary economic impacts weren’t expressed to be quantifiable with reasonable certainty, increases in revenue were projected to be possible if the state’s population increased as a result of reduced tax liability. Increases in expenditures were also projected to be possible if the demand for governmental programs increased as a result of population increases.
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