Trust and Estate Counsel

Tennessee Estate Planning Law

Insight and commentary on estate planning issues impacting affluent residents of Tennessee

Tennessee Class B Gift Tax

One of my clients called me today with a complaint about his Tennessee Class B Gift Tax. In 2009, he made a gift of $13,000 to his step-granddaughter. She had a tough year, including losing her job and getting divorced. $13,000 is the amount of the annual exclusion for federal gift tax purposes and Tennessee gift tax purposes for certain donees.

As a general rule, gifts that do not exceed the annual exclusion are exempt from gift tax. The problem is that Tennessee categorizes some donees as “Class B” beneficiaries. Class B beneficiaries consist of step-grandchildren, sisters-in-law, brothers-in-law, nieces, nephews, as well as persons who are not related to you.  Tennessee only allows you to make an annual exclusion gift of $3,000 per Class B beneficiary or $5,000 if you only make a gift to one Class B beneficiary.

Because my client’s step-granddaughter was the only Class B beneficiary to whom he made a gift, he owed tax of 6.5% times $8,000, or $520. My client was chapped because he was being “punished” for being generous to his step-granddaughter. In 2010, his gift to his step-granddaughter will only be $5,000.

Most people characterize the Class B gift tax as a silly tax. I suspect that it brings in less than $50,000 per year to the State. There have been numerous proposals to abolish the Class B distinction so that tax-free gifts of $13,000 can be made to anyone. Every time that a proposal is made, a fiscal note is attached to the bill and it never goes anywhere due to the fiscal note.

If you are making gifts to collateral relatives, you should consider limiting the gift to $3,000 per donee, or $5,000 if you are only making gifts to one Class B donee during the year if you want to avoid the Class B gift tax.