In America, the estate tax is a tax that is paid from the estate of a person who has recently passed away. Before heirs, descendants, and beneficiaries can receive their assets and property, estate tax must be paid. However, estate tax does not apply to all estates and is typically only required for estates valued above a certain monetary amount.
Estates are taxed at fair market value, or what the items within the estate are worth currently. Estates are not taxed on what you paid for them or what the value was when you acquired them. Generally, estates include cash, annuities, business interests, real estate, insurance, trust, and any other assets acquired. The total amount of all these items is called the “gross estate.”
Simple estates that only contain a small amount of assets and cash typically do not require the filing of an estate tax return. The Internal Revenue Service calculates the amount that the estate is worth plus the year of the person’s death to determine whether the estate tax is needed. If you have questions about an estate tax or would like to learn whether your estate is required to file an estate tax return, contact our law office today by calling 615-930-3350.
Does Tennessee Have Estate Tax?
There are 38 states that do not require estate tax. Tennessee is one of those states, meaning you are not required to pay state estate taxes when a loved one dies. This is good news for beneficiaries and heirs because they can receive assets from a loved one’s estate before paying taxes. However, it’s important to note that all debts and creditors must be paid before an estate can be closed.
What is the Federal Estate Tax?
While Tennessee does not have an estate tax, there is a federal estate tax that you may have to pay. The federal estate tax ranges from 18% to 40% and is generally applied to assets worth multiple millions of dollars. In most cases, assets left to a surviving spouse are not taxed because of the unlimited marital deduction.
If you would like to avoid the federal estate tax, there are a few methods you can use, including the following:
- Spend your assets. The less money your estate is worth, the less likely it is to be taxed. If you are not concerned about running out of money, spending it is an effective way to avoid the federal estate tax.
- Give away your assets. Leaving a property to charity makes it deductible from the gross estate, meaning there is less value to tax.
- Gift your assets to loved ones. Many states do not tax gifts up to a certain amount. Giving away parts of your estate lowers its overall value.
- Create a trust. Assets within an irrevocable trust are not subject to estate tax because they are technically not part of your estate anymore. Creating an irrevocable trust is an excellent way to reduce your tax liability.
- Move to a better tax environment. The majority of states, including Tennessee, do not have a state estate tax. If you are in a different state that does have a state estate tax, relocating may be a good option.
What is Inheritance Tax?
An inheritance tax is paid by the recipient of the estate after they receive any assets or property. For instance, if your loved one passed away and you inherited money and some property, you would pay an inheritance tax on it after you received it. This is in contrast to an estate tax, which is paid before beneficiaries receive their rightful assets.
If your state requires you to pay inheritance tax, it is applied to the portion of the estate that exceeds the exemption amount. The IRS calculates this amount. Any amount above the exemption threshold is taxed on a sliding scale and is typically taxed between 15% and 18%. The exemption that you receive and the rate you are charged will vary depending on your relationship with the deceased and the value of the assets you are inheriting.
Generally, the closer your relationship with the deceased, the higher the exemption rate. This means if you were very close to the deceased, you will likely pay a very low rate on your inheritance tax. Surviving spouses are always exempt from an inheritance tax, even in states that impose one. Domestic partners are exempt from the inheritance tax as well, except in New Jersey. In some states, direct descendants of the deceased are also exempt.
Does Tennessee Have Inheritence Tax?
No, Tennessee does not have an inheritance tax. In fact, most states do not impose inheritance tax, so it is very unlikely that you will have to pay an inheritance tax no matter where you live. Similarly, there is no federal inheritance tax, meaning if your state does not impose one, you do not have to pay one at all. If you have received an inheritance and are unsure whether you need to pay an inheritance tax, contact our law office today for more information.
What’s the Difference Between an Estate Tax and an Inheritance Tax?
Estate tax and inheritance tax are similar enough that they are often lumped together. However, they are two separate and distinct taxes that are paid at different times. The estate tax is based on the value of the estate and is paid by the estate itself. On the other hand, the inheritance tax is based on the value of the inheritance received by beneficiaries and is paid by the beneficiaries themselves.
While it is unlikely, there are some instances where an individual could be subject to both estate and inheritance taxes. For instance, if you inherit an estate large enough to trigger a federal estate tax and you live or own property in a state with inheritance tax, you may have to pay both taxes. In this scenario, the estate would be taxed federally before it is distributed and then again by the state after the beneficiaries have received their assets. Fortunately, Tennessee does not have an inheritance tax, meaning that if you live in the state, it is unlikely you will have to pay both of these taxes.
Should I Contact an Estate Planning Lawyer?
Estate planning can become complex, especially when paying taxes on an inheritance or before the estate is distributed. Neglecting to pay the correct tax amount can have unfortunate consequences with the IRS, so it is essential to understand what taxes you are required to pay and when you must pay them. At the Law Office of Chris Thompson, our team has extensive experience helping clients receive their rightful inheritance and paying the right taxes to avoid penalties and fees. If you have questions about an estate plan or any estate planning taxes, contact our office today for a free consultation at 615-930-3350.