Tennessee Estate Planning: No State Income Tax Advantages

Tennessee Estate Planning: No State Income Tax Advantages for Residents

Tennessee’s elimination of state income, estate, and inheritance taxes offers unique estate planning opportunities for residents. Understanding these advantages can help families and individuals maximize their wealth and plan for the future with greater flexibility.

Tennessee Tax Structure Changes

• No state income tax: Tennessee fully eliminated the Hall income tax on interest and dividends in 2021. Residents no longer pay state tax on earned or investment income, which can increase disposable income and long-term savings.

• No state estate tax: The Tennessee estate tax was repealed in 2016. This means estates are not subject to state-level taxation upon death, allowing more assets to pass to heirs.

• No inheritance tax: Tennessee’s inheritance tax was also eliminated, so beneficiaries do not pay state tax on inherited assets.

• Retirement income benefits: Retirement income, including pensions, Social Security, and withdrawals from retirement accounts, is not subject to state income tax. This can be especially beneficial for retirees seeking to preserve their nest egg.

Estate Planning Advantages

• Retirement planning: With no state tax on retirement income, residents can maximize their after-tax income during retirement. This can make Tennessee an attractive destination for retirees and those planning for long-term financial security.

• Trust situs: Tennessee’s favorable trust laws allow residents and non-residents to establish trusts in the state. Trusts can be used for asset protection, tax planning, and multi-generational wealth transfer. Tennessee law also permits long-term “dynasty” trusts, which can last for hundreds of years.

• Interstate coordination: For individuals with assets or beneficiaries in multiple states, Tennessee’s tax structure can simplify estate planning. However, it’s important to consider the tax laws of other states where property or beneficiaries are located, as those may still impose taxes.

Tennessee-Specific Strategies

• Trust establishment: Take advantage of Tennessee’s modern trust statutes, which offer flexibility, asset protection, and privacy. Directed trusts and asset protection trusts are popular options for residents and out-of-state families alike.

• Retirement account planning: Since retirement income is not taxed at the state level, strategies can focus on federal tax efficiency and maximizing account growth. Required minimum distributions (RMDs) and Roth conversions may be more attractive in this environment.

• Family business succession: The absence of state estate and inheritance taxes can make it easier to transfer family businesses to the next generation without triggering significant tax liabilities. However, federal estate and gift taxes may still apply, so comprehensive planning is essential.

Tennessee’s tax structure provides significant estate planning advantages for residents, but each family’s situation is unique. It’s important to review all assets, consider federal tax implications, and coordinate with any out-of-state property or beneficiaries.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Estate planning outcomes can vary widely depending on your personal circumstances and the evidence available. For specific guidance, consider your unique situation and review all relevant documents and laws.