Federal estate tax exposure is a planning problem many families underestimate until they do the actual math. The federal estate tax rate on amounts above the exemption reaches 40 percent. The exemption is scheduled to drop under current law, which means families not currently exposed may be exposed within a few years.
Tennessee does not impose its own estate tax. But federal estate tax applies no matter what state the family lives in. For families whose assets will likely exceed the federal exemption at death, estate planning now is substantially cheaper than paying tax later.
How the federal estate tax actually works
The tax applies to the value of everything the person owned at death. Real estate. Investment accounts. Retirement accounts. Business interests. Life insurance proceeds, if the policy was personally owned at death. Personal property.
The federal exemption shelters a defined amount from tax. Everything above the exemption is taxed at rates reaching 40 percent. The number is scheduled to be substantially lower after the current law sunset. Families who are close to the current exemption should assume they will be over the new one.
Irrevocable trusts remove assets from the taxable estate
The foundation of estate tax planning is simple. Assets owned at death are taxed. Assets properly transferred into an irrevocable trust during life are not.
A properly structured irrevocable trust takes assets out of the settlor's estate. The assets grow inside the trust. They pass to beneficiaries at the settlor's death without being counted as part of the taxable estate. The same separation that keeps those assets out of the estate is also the basis for many asset protection strategies.
For families with real estate, closely held business interests, or appreciating investment assets, this is the primary tool for reducing estate tax exposure.
Spousal Lifetime Access Trusts
A Spousal Lifetime Access Trust, or SLAT, is one of the most commonly used estate tax planning vehicles for married couples. One spouse creates an irrevocable trust for the benefit of the other. The assets leave the first spouse's estate. The second spouse retains indirect access through distributions.
For couples who want to use the current estate tax exemption before it drops but are not ready to permanently part with the economic benefit of the assets, SLATs are often the right structure.
Grantor Retained Annuity Trusts
A Grantor Retained Annuity Trust, or GRAT, is used to transfer appreciation on an asset out of the estate with minimal gift tax cost.
The settlor transfers an asset into the GRAT. The GRAT pays the settlor back an annuity over a defined term. At the end of the term, whatever is left in the GRAT, which is typically the appreciation above the IRS's assumed rate of return, passes to the beneficiaries estate-tax-free.
For families with assets expected to appreciate significantly, GRATs are a powerful way to transfer the growth without using up the lifetime exemption.
Irrevocable Life Insurance Trusts
Life insurance owned personally at death is included in the taxable estate. For a family with a significant policy, that inclusion can create meaningful federal estate tax exposure.
An Irrevocable Life Insurance Trust, or ILIT, owns the policy outside the settlor's estate. The death benefit passes to beneficiaries without being taxed as part of the estate. For families using life insurance to provide liquidity at death or to equalize inheritances among children, the ILIT is standard.
Generation-skipping planning for multi-generational wealth
For families planning across more than one generation, trusts can be structured to use the generation-skipping transfer tax exemption effectively. Assets placed in a properly structured dynasty trust can benefit multiple generations without being subject to estate tax at each generation's death.
Tennessee permits trusts to last up to 360 years under T.C.A. § 66-1-202. For practical planning purposes, that is a perpetual dynasty trust. Combined with the generation-skipping tax exemption, this allows significant wealth to pass across generations with substantially reduced total tax.
Timing matters more than most families realize
The single most important thing to understand about estate tax planning is that it must be done well before death. Transfers made shortly before death are limited in their effectiveness. The strongest tools require years of lead time to work properly.
For families likely to face federal estate tax exposure, planning in your fifties and sixties is substantially more effective than planning in your late seventies and eighties. Starting earlier gives the plan time to compound.
If you want to understand what your estate tax exposure actually looks like under current and projected law, and what structures would reduce or eliminate it, we help families build estate tax plans designed for the long term. Schedule a consultation with our team.