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IN DEPTH: ESTATE PLANNING
From the April 15, 2005 print edition of the Memphis Business Journal


Live here, die there

Avoiding unfavorable estate taxes may mean moving out of Mid-South

By Rob Robertson

According to a report by Forbes magazine, the Mid-South is not a good place to die.

The "Best Places to Die" report ranks the states according to a variety of factors, including the availability of quality health care, legal protection and estate taxes.

Utah topped the list, judged by Forbes as the state where the dying are most likely to receive the best all-around care and legal protection.

At the opposite end of the spectrum was Washington, D.C., where the dying are least likely to receive proper treatment, according to Forbes.

Rounding out the best places to die were Oregon, Delaware, Colorado and Hawaii. Following the District of Columbia at the bottom in ascending order were Illinois, Ohio, Louisiana and Mississippi.

Tennessee and Arkansas both ranked near the bottom of the list as well, placing 35th and 43rd, respectively.

Tennessee fares better than its Mid-South neighbors primarily because of better hospitals and access to higher-quality medical care, according to Forbes.

Tennessee taxes on estates and unearned income, however, are another story.

To create its rankings of "Best Places To Die," the Forbes criteria contained key elements of estate planning, including a state's legal protections afforded to the elderly and the dying and each state's
particular estate tax laws, which impact the amount of money heirs may inherit.

Rice Byars of the Memphis law firm Harris, Shelton, Hanover & Walsh PLLC devotes a considerable part of his practice to estate planning, and says Tennessee's estate tax laws differ from most of the rest of the country -- and not necessarily in a positive way.

Currently Arkansas and Mississippi both assess their own estate taxes that are designed to absorb the federal estate tax credit with no additional estate taxes imposed. This is often referred to as a "pick-up" tax, because the states' estate tax laws essentially pick up any slack created under the federal laws.

Tennessee, however, imposes an inheritance tax and an estate tax that is intended to absorb the difference between the inheritance tax and the maximum credit against the federal estate tax.

"In most states when you die, if your estate is worth less than $1.5 million you don't pay any extra state tax," Byars says. "In Tennessee that's not the case."

Tennessee's estate tax exemption is currently $950,000, while the federal exemption is $1.5 million.

In 2006, the federal exemption rises to $2 million, though Tennessee's exemption will likely not rise above $1 million by then.
"Tennessee has not kept up with the estate tax exemptions that the federal government has initiated," Byars says. "That's a concern because most clients have wills that leave assets and trusts to the
maximum extent the federal government allows, but because Tennessee does not keep up with those increases, clients could wind up paying that tax when they thought there was no tax at all."

There are other potential tax issues in the Volunteer State that may complicate estate planning, too.

Tennessee has a free-standing gift tax, which can foil attempts to reduce estate value -- and tax penalties -- when making gifts, such as giving cash to children before death.

"If you want to give $100,000 to your child before you die in Tennessee, you would owe no federal tax," says attorney Joe Walker of Armstrong Allen. "But Tennessee applies taxes to that amount over $11,000, so you would wind up paying taxes on the remaining $89,000. That's a surprise to most people."

Tennessee also imposes a 6% flat tax on unearned income, called the Hall Tax, which allows the state to collect taxes on interest and dividends earned through investments.

Thus, while Tennessee may be one of only seven states without a tax on earned income like wages, the state constitution permits the state to tax unearned income.

"People think Tennessee doesn't have an income tax, but it actually does," says Andy Shaul, an accountant with Financial Strategy Group PLC in Memphis. "Meanwhile, Florida has no income tax,
no gift tax, and no extra estate tax. People aren't just retiring there for the weather."

Byars says he doesn't think people should move just to get better tax treatment, "but if you already have a vacation home there, a lot of Tennessee residents might be advised that Florida is a better
place to die."

Meanwhile, Tennessee has no plans to keep up with the federal increases in estate tax exemptions, according to state Sen. Mark Norris of Memphis.

"We have talked informally about equalizing the federal and state exemptions, but it has not been given serious consideration given the state's current financial condition," Norris says.

In the coming years, however, Norris says there will most likely be a lot of changes to the way many other states impose their estate taxes, as changes to the federal estate tax laws enacted in 2001 take effect.

Those changes include the gradual phase-out of the state death tax credit, which means that states with only a pick-up tax will lose their estate tax revenues entirely unless additional state estate taxes are enacted.

Norris says in those states, some form of higher taxes will have to be imposed somewhere to make up the shortfall.

"Mississippi and Arkansas are going to be trying to find some way to recover that loss of income," says Norris, who is also an attorney with Armstrong Allen.

"I don't know what the upshot of that will be, but it could wind up like what we have in Tennessee."

Still, Tennessee does have some things going for it that other states may not, according to Walker.

Pensions, for instance, escape Tennessee's Hall Tax because of their relationship to earned income.

"One thing that is positive about Tennessee is its treatment of pension plans," Walker says. "Some neighboring states may tax pension plans separately or as part of their income tax system."

CONTACT staff writer Rob Robertson at 259-1726 or rrobertson@bizjournals.com

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