Inheritance Tax in California: Essential 2024 Guide

California Has No State Inheritance Tax

Here’s the good news: California abolished its inheritance tax back in 1982. That means you won’t face a separate state tax bill just because you inherited money, property, or investments from a deceased family member. Unlike states such as Iowa, Kentucky, Maryland, New Jersey, and Pennsylvania, California residents don’t have to worry about state-level succession taxes eating into their inheritance.

This is genuinely one of California’s tax advantages. However—and this is important—the absence of a state inheritance tax doesn’t mean your inheritance is tax-free. The federal government still has its hand in the pot, and depending on the size of the estate, you could owe substantial federal taxes. Plus, there are other California-specific rules about property and income that can complicate things.

Federal Estate Tax Still Applies

While California skips the inheritance tax, the federal government absolutely does not. The federal estate tax is a tax on the total value of a deceased person’s estate before it’s distributed to heirs. For 2024, the federal estate tax exemption is $13.61 million per individual (or $27.22 million for married couples filing jointly). If your estate exceeds these thresholds, the IRS taxes the overage at a whopping 40%.

Here’s what catches many people off guard: this exemption is scheduled to drop significantly in 2026. Unless Congress acts, it’ll fall to roughly $7 million per person. That means estates that seemed safe today could face serious federal tax exposure in just a couple of years. If you’re in California and have substantial assets—real estate, investment accounts, business interests—you need to pay attention to this timeline.

The federal estate tax applies to the entire estate, regardless of whether you live in California or another state. So even though California doesn’t tax inheritance, your heirs could still owe federal taxes if your estate is large enough. This is where smart tax planning strategies become essential.

Understanding Stepped-Up Basis

Now here’s where things get interesting—and potentially very beneficial. When someone inherits assets, those assets receive what’s called a “stepped-up basis.” This means the cost basis (the value used to calculate capital gains tax) is reset to the fair market value on the date of death, not the original purchase price.

Let’s say your parent bought Apple stock 30 years ago for $500. It’s now worth $50,000. If you inherited that stock, your cost basis would be $50,000, not $500. If you immediately sold it, you’d owe zero capital gains tax. This is a massive tax break for heirs and is one reason wealthy families focus on proper estate planning.

However, the stepped-up basis is also threatened. There’s ongoing discussion in Congress about modifying or eliminating this benefit for high-net-worth estates. If you have substantial appreciated assets, this is another reason to review your estate plan sooner rather than later. You might consider strategies like managing capital gains strategically before death or using trusts to optimize the stepped-up basis benefit.

Prop 13 and Property Transfer Rules

California’s Proposition 13 (passed way back in 1978) caps property tax increases at 2% per year, regardless of how much the property’s market value increases. This is great if you own property, but it gets complicated when property transfers to heirs.

Generally, when you inherit California real estate, the property’s assessed value doesn’t automatically reset to market value (unlike the stepped-up basis for income tax purposes). However, there are exceptions. If the property transfers to someone other than a spouse or direct descendant, or if it’s deemed a change in ownership, the county assessor may reassess the property at current market value, potentially triggering a significant property tax increase.

Spouses inheriting property from each other and children inheriting from parents get special treatment under Prop 13—the property typically maintains its lower assessed value. But this gets murky with blended families, trusts, and more complex situations. If you own valuable California real estate, understanding these rules is crucial for your heirs’ financial planning.

Income Tax Obligations for Heirs

Here’s something people often overlook: while inherited assets themselves aren’t taxable income, the income those assets generate is. If you inherit a rental property, stock portfolio, or business, any income produced after the inheritance date is fully taxable to you.

For example, if you inherit a rental house, you’ll owe California state income tax (which tops out at 13.3%, one of the highest in the nation) and federal income tax on the rental income. If you inherit dividend-paying stocks, those dividends are taxable. If you inherit a business, the business income is taxable.

Additionally, if the deceased person had unpaid income taxes or other obligations, the estate may be responsible for those before assets are distributed to heirs. This is why reviewing the decedent’s final tax return and understanding all outstanding tax liabilities is critical. You might want to consult resources on deductible expenses related to estate administration.

Smart Estate Planning in California

Given California’s high income tax rates and federal estate tax exposure, proactive estate planning isn’t optional—it’s essential. The right plan can save your heirs hundreds of thousands of dollars.

Common strategies include using revocable living trusts to avoid probate (which is expensive and public in California), establishing irrevocable life insurance trusts to keep life insurance proceeds out of your taxable estate, and using charitable remainder trusts if you want to support causes you care about while reducing estate taxes.

Many California residents also use qualified personal residence trusts (QPRTs) to transfer their homes at a discount for estate tax purposes, or they establish family limited partnerships for business and investment assets. These strategies work best when implemented years before death, not hastily put together in an estate planning emergency.

The key is that California’s lack of state inheritance tax shouldn’t lull you into complacency. The federal exposure and California’s unique property tax rules mean you need a comprehensive plan. Check out our guide on California tax strategies for more context on how the state’s tax environment affects your overall financial picture.

Annual Gifting and Tax Strategies

One underutilized strategy is annual gifting. The IRS allows you to gift up to $18,000 per person per year (in 2024) without any gift tax consequences or impact on your lifetime exemption. Married couples can gift $36,000 per year to each recipient.

By strategically gifting during your lifetime, you accomplish two things: you reduce your taxable estate (lowering federal estate tax exposure), and you get to see your heirs benefit from the money. This is often called “dying with zero”—the goal being to minimize what’s left in your estate at death.

You can also pay someone’s medical bills or tuition directly to the provider without it counting against your annual gift limit. For California residents with significant wealth, a combination of annual gifting, strategic charitable giving, and proper trust structures can dramatically reduce tax burdens across generations.

When to Hire Professional Help

If your estate is under $1 million and relatively straightforward, you might manage with basic estate planning documents from an online service. But if you own California real estate, have a business, have substantial investment accounts, or are part of a blended family, you really need professional guidance.

A good estate planning attorney in California (expect to pay $1,500–$5,000 for a comprehensive plan) can save your heirs far more than that cost. They’ll navigate Prop 13 implications, federal estate tax strategies, and California-specific rules. A CPA or tax advisor can help coordinate tax planning with your overall financial strategy.

The emotional side of this matters too. Nobody wants to think about death or taxes, but avoiding the conversation usually means your heirs face chaos, higher taxes, and family conflict. Getting professional help early removes the burden from your loved ones and gives you peace of mind.

Frequently Asked Questions

Does California have an inheritance tax?

No. California eliminated its inheritance tax in 1982. Heirs don’t owe state tax on inherited money or property. However, federal estate taxes may apply if the estate exceeds the federal exemption threshold ($13.61 million in 2024).

Do I owe taxes on inherited money?

The inherited money itself isn’t taxable income. However, any income generated by inherited assets after the inheritance date is taxable. For example, interest from an inherited savings account or rent from inherited property is taxable.

What is stepped-up basis?

Stepped-up basis means inherited assets are valued at their fair market value on the date of death, not their original purchase price. This can eliminate capital gains tax for heirs who sell inherited appreciated assets immediately after inheritance.

How does Prop 13 affect inherited property?

Generally, property inherited by a spouse or direct descendant maintains its lower assessed value under Prop 13. Other heirs may trigger a reassessment at current market value, potentially increasing property taxes significantly.

What’s the federal estate tax exemption for 2024?

The federal estate tax exemption is $13.61 million per individual ($27.22 million for married couples). Estates exceeding this threshold are taxed at 40% on the overage. The exemption is scheduled to drop in 2026 unless Congress acts.

Should I hire an estate planning attorney?

If your estate exceeds $1 million, includes California real estate, or involves a blended family, professional estate planning is highly recommended. The cost of proper planning is typically far less than the taxes and complications your heirs might face otherwise.

Can I reduce my taxable estate through gifting?

Yes. You can gift $18,000 per person per year (2024) without gift tax or impact on your lifetime exemption. Strategic gifting reduces your taxable estate and allows you to see your heirs benefit during your lifetime.