An inheritance tax is essentially a tax on the amount of money or assets the heirs or beneficiaries of an estate receive. Each state sets its own inheritance tax rates and exemptions, based on the value of the estate as well as the relationship of the beneficiaries. Currently, only six states require an inheritance tax – including neighboring Kentucky. The good news is that Tennessee is not one of those six states. This means that if you are a resident of Tennessee, or own real estate in this state, you will not have to pay an inheritance tax.
In January of 2016, Tennessee repealed its inheritance tax to encourage residents to continue to live and retire within the state. The only situation where this tax might be owed is if a person died before 2016 and left a highly valuable estate that has not been probated. Here is the breakdown on the exemptions for each year starting in 2006:
- 2006-2012 $1 million exemption
- 2013 $1.5 million exemption
- 2014 $2 million exemption
- 2015 $5 million exemption
- 2016- Present No inheritance tax
Inheritance Tax in Other States
Understand that even if you are a Tennessee resident, it does not exclude you from inheritance tax liability should you own real estate in another state. For example, let's say that you own property in Kentucky. Depending on the value of the property and who you leave the property to could subject you to Kentucky's inheritance tax. Each state has a right to tax assets physically located within its borders. So be careful about real estate. Understand that even though you may reside in Tennessee, the property you own in another state can be subject to taxation in that state.
Estate Tax in Other States
An estate tax is a tax on the value of the individual's net estate at their death. Currently, twelve states have estate taxes, with some exemptions being as low as $1 million. Like the inheritance tax, you need to be aware of the laws of states in which you have real property as you could have exposure to that state's estate tax.
Federal Estate Tax
The federal government does not have an inheritance tax. However, it does have an estate tax. For 2019, the exemption in set at $11.4 million per individual and it is set to increase in 2020 to $11.58 million. Couples can combine their exemption with proper planning providing them with a total exemption of over $23 million.
The estate tax has long been a source of political controversy in Washington. Experienced estate planners will tell you that the likelihood of a substantial reduction in this exemption is high in the coming year as the political winds shift.
How to Plan for the Inheritance Tax
Even though Tennessee does not have an inheritance tax, other states do. Be aware of that your assets located in other states may be subject to that locality's inheritance or estate tax. The possibility of the government taxing your hard-earned money after your death is a valid concern. As you plan for your financial future, and it's a good idea to review your finances to make sure you or your family will not owe these taxes. If you are concerned that you will potentially incur these taxes, contact an attorney who specializes in taxes and estate planning to evaluate the value your assets.