Changes made by a 2001 Federal Tax Law that were not duplicated by Tennessee have presented an issue for Tennessee residents whose estates currently exceed $700,000 in value. If this applies to you, then it is extremely important that your current estate planning documents (Will or Revocable Trust) be updated, if they have not already been amended.

The so-called "Tennessee Gap" exists because the amounts exempt for Federal Estate Tax purposes and for Tennessee Inheritance Tax purposes are no longer the same. Prior to 2001, both the Federal and Tennessee exemptions were $600,000. Since then, the Federal exemption is increasing faster (and will do so for a longer period of time) than the Tennessee exemption. The following table sets forth the current schedules:

YEAR FED'L EXEMPTION TN EXEMPTION TN GAP
2002 $1,000,000 $700,000 $300,000
2003 1,000,000 700,000 300,000
2004 1,500,000 850,000 650,000
2005 1,500,000 950,000 550,000
2006 2,000,000 1,000,000 1,000,000
2007 2,000,000 1,000,000 1,000,000
2008 2,000,000 1,000,000 1,000,000
2009 3,500,000 1,000,000 2,500,000
2010 Unlimited 1,000,000 None
2011 & After 1,000,000 1,000,000 None.

The difference between the two exemption amounts has been called the "Tennessee Gap."

If there is no change in federal or Tennessee law between now and 2011, then the Tennessee Gap will disappear in the latter year. As always, there is uncertainty whether Congress (or, less likely, the Tennessee legislature) will change these tax laws. In any event, planning must be done based on the current laws. In light of this fact, if you are a Tennessee resident and your plus your spouse's combined estates are valued at over $700,000 (including the face value of life insurance policies and all retirement benefits and accounts), then you should change your Will or Revocable Trust to avoid unnecessary tax.

The following table shows the Tennessee Inheritance Tax payable at the death of the first spouse to die if the planning is not implemented in your estate planning documents. These amounts assume the first spouse to die had at least $1,000,000 in his or her separate estate.

YEAR TN GAP TN INHERITANCE TAX

ON GAP AMOUNT
2002 $300,000 $19,700
2003 300,000 19,700
2004 650,000 50,150
2005 550,000 40,650
2006 1,000,000 83,400
2007 1,000,000 83,400
2008 1,000,000 83,400
2009 2,500,000 225,900.

The reason your Will or Trust may need modification is to draft a special "Tennessee Gap Trust" to eliminate the Tennessee Inheritance Tax shown above that would otherwise be payable at the first spouse's death. This additional trust can be added to by use of a Codicil to a Will or it can be added to a Revocable Trust through an Amendment to the Trust Agreement.

(Copyright © 2003, all rights reserved. Provided by Martin L. Pierce, a Member of the Chattanooga office of Husch & Eppenberger, LLC, a Business and Tax attorney who is certified as an Estate Planning Specialist.)