Louisiana Estate Tax: 5 Surprising Strategies [+ IRS Pitfalls]

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Paul Sundin, CPA

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The great state of Louisiana has a variety of taxes that are assessed. You are probably aware of the real estate taxes and state income tax. But what about the Louisiana estate tax?

In this article, we take a look at some of the taxes that Louisiana residents face. Let’s get started.

Louisiana estate tax

When it comes to estate tax, I’ve got some good news. Louisiana does not levy an estate tax against its residents.

But just because Louisiana does not have an estate tax does not mean that the same is true for the federal government. Fortunately, only 1% or less of total households are required a file an estate tax return. But everybody should be aware of the rules.

Although Louisiana has no estate tax, residents of other states will have to pay federal estate taxes when their loved ones pass away. It is important to plan your estate so that your assets are protected and your affairs are in order in case of your death.

A surviving spouse is entitled to a percentage of an estate if it is “rich in comparison” to the deceased person’s own property. The term “rich” is not specifically defined, but the courts use the rule of five to one to determine if the estate is “rich” or “poor” in Louisiana.

A surviving spouse may have a difficult time proving the value of his or her own assets in a case where there is no surviving spouse.

If a person dies in Louisiana, there are several things to consider. While Louisiana does not have an inheritance tax, it has a very high threshold for the death tax. Because of the estate tax, it is important to understand the threshold and the limits for exemptions.

Some states do not have an estate tax at all, so if you have a large estate, you may be able to deduct the Louisiana estate taxes by paying a higher percentage.

Federal estate tax exemption

Estate tax is often referred to as the death tax. Well this is not the technical term, but it is often referred to as such in the media.

Most people assume the estate tax is complex to calculate. That can certainly be the case. Especially when it comes to valuation of all estate assets.

The first step in the process is to summarize all the values of estate assets. Stocks, bonds, retirement accounts and mutual funds are rather straightforward. But it can be a little bit more complex for real estate and certain business entities.

Once final valuations are determined and reviewed, the executor of the estate summarizes certain administrative expenses like legal and accounting costs. Other expenses like funeral and burial costs can also be subtracted. Don’t forget to reduce the estate for any mortgages or other obligations of the decedent. 

The estate tax rate at the federal level is 40%. Because it is so high make sure to reduce your net assets as low as possible to minimize any estate tax liability.

Gift tax & inheritance tax

Louisiana also does not have an inheritance or gift tax. It really should not be much of a surprise.

Most states with no estate tax have no gift tax either. Also only seven states have any inheritance tax.

In order to minimize the impact of gift and inheritance taxes on beneficiaries, a person can consider gifting assets to them. A gift can increase the value of the asset for the recipient, and it can reduce the taxable estate.

It is also possible to avoid tax on the inherited amount by utilizing the deemed disposition method. The following are some common ways to transfer assets. Hopefully, this information will help you make informed decisions regarding your family’s future.

If your gift is for a person who is not a U.S. citizen, you can still receive a gift tax credit. However, you will have to deduct the value of the underlying asset.

Other family members that fall under this threshold include parents, siblings, nieces and nephews. Lineal descendants and lineal ancestors are excluded.

When transferring assets, you must be aware of the costs and benefits of gift and inheritance tax. When a person gifts an asset, the cost basis will transfer to the recipient. This could lead to a taxable gain if the asset is highly appreciated.

Thankfully, when a gifted asset is sold soon after receiving it, the cost basis will reset to its original value, which will help the beneficiary avoid a taxable gain.

Trust tax strategies

Trust taxation is different from income taxation. A trust is an entity that was established by a grantor for the benefit of a group of beneficiaries. The trustee administers the trust and is taxed on the income from the assets.

The beneficiaries can be a group receiving corpus or current income. The principal beneficiaries are the same as the income beneficiaries. The other types of beneficiaries are children born after the trust was established. The grantor controls the trust.

The income tax on retained income may be higher than the beneficiary’s tax bracket. This is one reason why many trustees consider distributing all the DNI during the year. Fortunately, the Internal Revenue Service has a 65-day rule and election to reduce taxes on retained income.

While the rules of taxation can be complicated, they are designed to minimize tax for trust beneficiaries. When planning your estate, trust taxation is important. The Internal Revenue Service offers several useful tools for trusts.

When deciding on the type of trust to use, the grantor should consider the type of trust that will best serve his or her financial interests. Some types of trusts are irrevocable, while others are revocable.

In both cases, the grantor retains control over the trust and must pay income taxes on that income. A revocable family foundation can be a good way to protect assets from taxes, while a revocable one provides more flexibility for a family.

Overall Louisiana tax situation

Louisiana is a moderately tax friendly state. While the state has real estate taxes and income taxes, it is rather friendly for people with large estates.

We know that estate planning can be complex. That's why we are there every step of the way.

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