Does Louisiana Have an Inheritance Tax?
Real Simple’s recent article entitled “Here’s Which States Collect Zero Estate or Inheritance Taxes” explains that inheritance taxes are levies paid by the living beneficiary who gets the inheritance. And both federal and state governments can apply estate taxes, which are levied against the assets that are bequeathed.
Just five states apply an inheritance tax: New Jersey, Nebraska, Iowa, Kentucky and Pennsylvania. There are 12 states that have an estate tax: Washington, Oregon, Minnesota, Illinois, New York, Maine, Vermont, Rhode Island, Massachusetts, Connecticut, Hawaii and the District of Columbia. Maryland collects both. As a result, there are 32 states that don’t collect death-related taxes: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Hawaii, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.
But even if you live in Louisiana, there are three othter things to keep in mind. First, even if you live in Louisiana (or another states that does not impose an inheritance or an estate tax), if you own real estate in a state that does, that real estate will be subject to that state’s tax.
Second, if you have an heir that lives outside of Louisiana in a state that imposes an inheritance tax, that heir might still be subject to that state’s tax. That is becasue an inheritance tax is a tax on the person who inherits the property, not the estate itself.
Third, and even more importantly for Louisiana residents, if your estate is not structured correctly, the property in your estate may be subject to the INCOME tax by foreging the “step up” in basis at death. This is what I call the “hidden” estate tax. It operates almost like an inheritance tax (on the heirs), but it is much more severe and it is levied through the INCOME TAX SYSTEM.
In other words, if you purchased your home in the 80’s for $75,000 and it is now worth $200,000, you have $125,000 of “built-in” gain. The potential INCOME tax rate on that built in gain, even if all of it is classified as a “capital gain” is 26% (20% federal capital gains tax + 6% Louisiana top income tax rate). The failure to plan for that income tax and the step up on this transaction could be a whopping $32,500 ($200,000 – $75,000 = $125,000 and $125,000 X .26 = $32,500). That $32,500 tax would be borne by your heirs due to poor planning. Don’t confuse the exclusion of gain on the sale of a home with this example. The exclusion does not apply to your heirs.
To better estimate and project the possible outcomes, you should consider an intergenerational planning meeting. There are some families that like the transparency of establishing a trust. This can minimize fighting and avoid probate. Trusts are also taxed differently than individuals. There’s more certainty about who will bear the costs.
There are families that gift assets, while an elderly or chronically ill person is still alive. These gifts can be subject to taxation, but there are exceptions for tuition and medical expenses. Gifts to children may also be excluded.
There’s no one-size-fits-all approach to transferring valuable or sentimental assets. You can list the most important people and causes in your life. If that list has people in other states, it will be even more important to prepare everyone for their role and responsibilities with the help of an experienced estate planning attorney.
If inheritance tax sounds intimidating, start small with updating the beneficiary forms on your bank accounts and employer-led retirement accounts. Organize documents, such as insurance information and house titles and deeds. Make them secure but accessible to those who might need them, if you’re unavailable.
Even if you’re socially distancing, many estate planning attorneys offer consultations via video conferencing. There’s no reason to delay another year to clarify your inheritance and estate plans.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “Does Louisiana Have an Inheritance Tax?” read these additional articles: Can I Avoid Password Problems for My Family in Estate Planning? and Do Dental Problems Mean Cognitive Impairment? and Is Prince’s Estate Settled Yet? and How Do You Split an Estate in a Blended Family?
Reference: Real Simple (Nov. 24, 2021) “Here’s Which States Collect Zero Estate or Inheritance Taxes”