If you inherit property from a decedent who was a resident of Tennessee, or real or personal property located in Tennessee, you could be subject to the Tennessee inheritance tax. This is a tax on the heirs who receive the property and is different from the federal and Tennessee estate taxes, which are based on the total net value of the estate.
Exemption
In Tennessee, the state inheritance and estate taxes are imposed on estates that exceed the maximum single exemption, which is $1,000,000 (effective since 2006). So for estates with a total net value of less than $1,000,000 there would be no Tennessee inheritance tax.
If the decedent was not a resident of Tennessee, the exemption is prorated. This is because inheritance tax is charged only on real and tangible personal property physically located in Tennessee in the case of a nonresident. The prorated exemption is based on the percentage of the value of the property included in the gross estate compared to the total value of all the property that would have been included in the gross estate if the decedent had been a Tennessee resident.
For example, assume a nonresident decedent had real and tangible personal property located in Tennessee with a total value of $750,000, a gross estate of $1,500,000, and real and tangible personal property outside Tennessee with a value of $250,000. The prorated exemption would be calculated as $750,000 divided by $1,250,000 (gross estate of $1,500,000 minus $250,000, the value of real and tangible personal property outside Tennessee) = 60%. 60% of the total exemption of $1,000,000 = $600,000. The amount subject to Tennessee inheritance tax would be $150,000 ($750,000 of property in Tennessee minus the prorated exemption of $600,000).
Inheritance tax rates
According to the Tennessee Department of Revenue, after taking into account the $1,000,000 statutory exemption, the inheritance tax rates are 5.5% on the first $40,000, 6.5% on the next $40,000 to $240,000, 7.5% on the next $240,000 to $440,000, and 9.5% on amounts of $440,000 and over.
In Tennessee, there is no distinction between classes of beneficiaries as is the case with the inheritance tax in other states. All beneficiaries are subject to the same tax rates. But as pointed out in the CCH Financial Planning Toolkit website, the surviving spouse is completely exempt from the inheritance tax. Transfers to a federal, state or local government, and donations to charitable organizations are also exempt.
What property is subject to the Tennessee inheritance tax?
When the decedent was a resident of Tennessee all real and tangible personal property located in Tennessee is subject to the Tennessee inheritance tax. Also, all intangible property located outside Tennessee is taxable. But real and tangible personal property outside Tennessee are not taxable.
Real and tangible personal property in Tennessee include real estate, household goods, automobiles, boats, travel trailers, jewelry, antiques, farm machinery, livestock, and growing crops.
In the case of a resident of Tennessee, intangible property located in or outside Tennessee, that must be included on the inheritance tax return, include cash, bank accounts, certificates of deposit, stocks, bonds, life insurance proceeds payable to named beneficiaries or to the estate, the cash surrender value of life insurance policies owned by the decedent on another person’s life, notes receivable, debts due the decedent, income tax refunds, royalties, annuities, and business interests in sole proprietorships and partnerships.
As indicated above, when the decedent was not a resident of Tennessee, only real and tangible personal property physically located in Tennessee is subject to the Tennessee inheritance tax. Intangible personal property, wherever located, and real and tangible personal property located outside Tennessee is not taxable for a nonresident decedent.
Both probate and non-probate assets are subject to the Tennessee inheritance tax. For example, property the decedent leaves in a revocable living trust would be subject to the inheritance tax. Property that the decedent owned jointly with another person must also be included for inheritance tax purposes, to the extent of the decedent’s ownership.
Valuation
According to the Tennessee Department of Revenue, all property must be reported for inheritance tax purposes at its “full and true value” at the decedent’s date of death. Appraisals may be needed for real and tangible personal property.
Stocks and bonds listed on exchanges are valued at the mean between the high and low sales prices on the date of death, or if the stocks and bonds were not traded that day, they should be reported at the weighted average between the nearest business days on which the securities are traded.
If the executor or administrator of the decedent’s estate chooses, an alternate valuation date, six months after the decedent’s death, can be used.
Deductions
Certain deductions can be taken from a decedent’s estate in determining the net value of the estate that is subject to Tennessee estate and inheritance taxes. These include the decedent’s outstanding debts at the time of death including mortgages and accrued property taxes and federal income taxes, death duties paid or payable to other states on intangible personal property, actual funeral expenses, appraisal fees, executor’s and attorney’s fees, and court costs.
Filing and payment
The Tennessee Department of Revenue indicates that when the gross estate of a decedent who was a resident of Tennessee is less than the maximum single exemption ($1,000,000), it is not necessary to file an inheritance tax return. When the gross estate is greater than that amount, a return must be filed.
Normally the personal representative in charge of administering the decedent’s estate files the inheritance tax return. If no executor or administrator has been appointed to manage the estate, the person in possession of the estate assets must file the inheritance tax return. Forms and instructions for filing the Tennessee inheritance tax return are available for downloading from the Tennessee Department of Revenue website at www.state.tn.us/revenue/forms.
The inheritance tax return must be filed, and the taxes paid within nine months after the death of the decedent. If additional time is needed, a written request can be filed for an extension of up to one year. Also, the Tennessee Commissioner of Revenue may allow the taxes to be paid in installments.
Sources:
CCH – Financial Planning Toolkit – Tennessee Estate Taxes: www.finance.cch.com
Holbrook, Peterson & Smith, PLLC – Exclusions, Deductions and Tax Rates: www.hpestatelaw.com
Pinnacle Financial Partners – Tennessee’s Death Tax: What it Means for You, by John L. Kea, II, J.D., CTFA: www.pnfp.com
Tennessee Department of Revenue – Inheritance Tax: www.state.tn.us
Reference:
- CCH – Financial Planning Toolkit – Tennessee Estate Taxes: www.finance.cch.com
