Q. Will my heirs need to pay a Louisiana Inheritance Tax when I pass?
A. No. Louisiana abolished the inheritance tax, and thus, your estate/your heirs do not remit any inheritance tax to the State of Louisiana, when you pass.
Q. Will my estate owe an Estate Tax when I pass?
A. The value of most “Gross” estates (your probate assets, but also, your non-probate assets, such as retirement accounts) fall under the IRS' Federal Estate Tax exemption for the combined “Gift and Estate Tax, and thus, most estates will not owe a Federal Estate Tax. For example, currently, the combined lifetime gift and estate tax exemption is $15M per person ($30M for a married couple). The annual updates to the IRS' exemption rate may be found here: https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
Q. Will my heirs/beneficiaries be liable for any Capital Gains Taxes when I pass?
A. It depends, but many times, there may not be a capital gain tax due. The IRS levies the capital gains tax on the profit you make from the sale on an asset like real property (there are also exemptions for your personal residence), or an investment. The first factor to consider for whether any capital gains tax may be owed is to confirm the cost basis of the asset – the original cost for the investment. If you sell an asset and make a profit, more than the cost basis, then, that will be a taxable event (either a short term or long-term capital gain tax). The IRS capital gains rates are here: ?? https://www.irs.gov/taxtopics/tc409.
Fortunately, for most estates, when heirs/beneficiaries receive assets of an estate, they receive those assets at the fair market value at the time of the Decedent's passing, and thus, they receive a “stepped-up” basis. This step-up in basis afforded when someone inherits an asset can many times alleviate a capital gain tax, if the asset is sold soon. IRS publication 551 on stepped up basis is found here, when searching for/going to “Inherited Property”: https://www.irs.gov/publications/p551
Q. What income tax consequences will my heirs/beneficiaries have upon receiving my investments?
| Asset Type | Contribution Type | Tax Treatment While You Own It | Tax Treatment When Funds Are Taken Out | Common Examples |
|---|---|---|---|---|
|
Non-Qualified Assets |
After-tax dollars |
Earnings may be taxable annually (interest, dividends, capital gains) |
Capital gains tax owed on growth when sold or withdrawn |
Brokerage accounts, individual stocks and bonds, mutual funds, CDs |
|
Qualified (Tax-Deferred) Assets |
Pre-tax dollars |
Tax-deferred growth while funds remain in account |
Withdrawals generally taxed as ordinary income |
Traditional IRA, 401(k), 403(b), SEP IRA |
|
Tax-Free Assets |
After-tax dollars |
Tax-deferred growth, if rules are met |
Tax-free qualified withdrawals |
Roth IRA, Roth 401(k), certain HSAs |
|
Insurance-Based / Special Tax-Favored Assets |
After-tax dollars |
Tax-deferred growth |
Tax-free withdrawals, if structured properly |
Life insurance cash value, annuities (tax-deferred growth), ABLE accounts |
Key takeaways on taxes by investment account:
- Roth dollars are contributed after you have paid taxes. Then, those dollars are not taxed again.
- Traditional accounts (401(k), IRA, etc) are funded with pre-tax funds, and then, the IRS levies a tax at income rates, when funds are withdrawn in retirement.
- For Taxable (brokerage) accounts, we contribute post-tax funds, and then, the IRS taxes those accounts at capital gains rates, when sold.