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Why It Pays to Retire In Tennessee

January 18, 2019 | Posted in: Insights, Wealth Strategies

Tennessee is experiencing record breaking tourism numbers, but it isn’t the only industry seeing an influx of people and money from out-of-state and around the world.  As hot as tourism is, Tennessee is also becoming an equally sought after destination for retirement.  With its temperate climate, exciting music scene, access to the Smoky Mountains and much more, the state has a lot to offer visitors and residents.  But when you add the three following key financial benefit areas, the idea of not only visiting Tennessee but retiring here is just as enticing.

Taxes – In Tennessee, state taxes are only applied on dividend and interest income.  Withdrawals from retirement accounts or Social Security benefits are not taxed as income in Tennessee.  Additionally, there is no state income tax on out-of state beneficiaries or state capital gains taxes.  As of January 1, 2016, the state of Tennessee no longer imposes a state inheritance tax.  Tennessee has no gift tax.

Trusts – Trusts are a big one for retirees in the Volunteer State.  Tennessee has been proactive and now provides some of the most favorable trust laws in the country  including:

a) The Tennessee Uniform Trust Code specifically provide a significant amount of flexibility for trustees and beneficiaries to resolve issues related to trusts with minimal court involvement.

b) The Tennessee Investment Services Act of 2007 (TISA) allows the creator of a trust to place assets in a Tennessee Investment Services Trust, also known as a self-settled or asset protection trust, to protect them from future lawsuits or creditors.  This trust is available to anyone in the nation as long as a qualified trustee is a resident of Tennessee or a company authorized by law to do business in Tennessee and authorized by law to be a trustee and is subject to certain regulatory oversight.  The Grantor must meet certain requirements and execute a “qualified affidavit” at the time of the establishment and funding of the trust.

c) The Tennessee Community Property Trust Act created significant benefits for trusts owned by husbands and wives.  It provides equal ownership of property, sharing of appreciation and income and reduces tax implications after the death of one spouse.  It is especially beneficial for non-residents who live in states that impose income taxes on capital gains or rental incomes.  The act additionally enhanced creditor protection for various trusts, including special needs and inter vivos marital trusts. As with the TISA, this act requires that the trustee be a Tennessee resident or a trust company authorized to do business in Tennessee and subject to certain regulatory oversight.

d) The Tennessee Uniform Trust Code provides for decanting.  Additional statutory improvements have been made to the statute in 2013.   Decanting has allowed both trustees and beneficiaries to improve troublesome provisions contained in prior trust agreements without court approval.  A trustee pursuant to the statute also has the authority to “decant” a trust.  This means that if a trustee has the right to make discretionary distributions of principal to or for a beneficiary, the trustee may exercise the discretion by distributing all or a portion of the trust assets to another trust for such beneficiary so long as certain requirements are met.

Due to this legislation, trusts now better protect assets from the beneficiary’s creditors, divorce and lawsuits, while providing trustees more flexibility – yet less exposure – to potential liability. Meanwhile, directed trusts allow a third party to advise and direct the trustee on specific issues.

IRA creditor protection – In Tennessee, retirement accounts are well protected from creditors while the initial owner is living.  Additionally, Tennessee has “opted out” of Bankruptcy Code section 522(b)(2) exemptions, therefore, in bankruptcy the initial owner’s IRAs and ERISA-qualified plan accounts are generally protected.

It isn’t difficult to understand why both tourism and retirement are booming in Tennessee.  The good news?  Neither are a passing fad.  The state’s rich music history will only grow, its scenic landscapes are here to stay, and, likewise, state leadership remains driven to keep Tennessee a top destination for retirees for generations to come.