Estate tax California presents a unique challenge for high-net-worth individuals and families looking to preserve their wealth for future generations. Unlike many states that have eliminated their own estate taxes, California’s situation is more nuanced—and understanding the rules could save your heirs thousands of dollars.
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California’s Estate Tax Status
Here’s the good news: California does not have a state-level estate tax or inheritance tax. This puts California residents in a better position than those in states like New York, Massachusetts, or Oregon, which impose their own estate taxes on top of federal obligations. However, don’t get too comfortable—if you’re a California resident with significant assets, you’re still subject to federal estate taxes, which is where the real complexity lies.
The absence of a California state estate tax means you only need to worry about one layer of taxation on your estate. But “only” is relative when we’re talking about tax rates that can exceed 40% at the federal level. For many California families, especially those in high-cost-of-living areas like the Bay Area or Los Angeles, real estate values alone can push estates well into federal estate tax territory.
Federal Estate Tax Basics
The federal estate tax applies to the total value of your estate when you pass away. This includes real estate, investment accounts, retirement accounts, life insurance proceeds, and business interests. The IRS taxes the amount of your estate that exceeds the federal exemption limit, and the rate is a flat 40%—one of the highest tax rates you’ll encounter.
What makes federal estate tax particularly painful is that it’s a tax on assets that have already been taxed. You paid income tax on the money you earned, and now your heirs face another massive tax bill before they receive their inheritance. This double taxation is why estate planning isn’t just for billionaires—it’s essential for anyone with substantial assets.
California property, including your primary residence, vacation homes, and rental properties, all count toward your federal taxable estate. This is especially relevant given California’s astronomical real estate values. A modest home in San Francisco or a beach property in Malibu could easily push your estate over the exemption threshold.
Exemption Limits in 2024
For 2024, the federal estate tax exemption is $13.61 million per individual, or $27.22 million for a married couple. This is a significant amount, but it’s not as high as it sounds when you factor in California real estate values. A couple with a $5 million primary home, a $2 million vacation property, $3 million in investment accounts, and $2 million in retirement assets is already at $12 million—getting dangerously close to the individual exemption.
The exemption amount is indexed for inflation and increases annually. However, here’s the critical issue: these exemption levels are set to expire at the end of 2025 unless Congress takes action. When they expire, the exemption reverts to approximately $7 million per individual (adjusted for inflation), which means your taxable estate could suddenly double in value for tax purposes.
Understanding your current exemption is the first step in estate tax California planning. If your estate exceeds these thresholds, you need a strategy in place now—not after you’ve passed away.
Portability Strategy Explained
One of the most underutilized tools in estate tax California planning is portability. If you’re married, portability allows the surviving spouse to use any unused exemption amount from the deceased spouse’s estate. In other words, if one spouse dies with a $13.61 million exemption and only has a $5 million estate, the surviving spouse can use that additional $8.61 million of unused exemption.
This strategy is powerful but requires proper execution. You must file an estate tax return (Form 706) within nine months of death, even if no estate tax is owed, to preserve the unused exemption. Many families miss this deadline and lose the benefit entirely. It’s one of those situations where a small administrative oversight costs hundreds of thousands of dollars.
Portability works well for couples with moderate estates, but it’s not a complete solution for high-net-worth families. If both spouses have substantial assets, you’ll need additional strategies beyond portability alone.
Trusts and Bypass Strategies
For larger estates, bypass trusts (also called credit shelter trusts or exemption trusts) remain essential planning tools. A bypass trust allows you to use your full exemption to shelter assets from estate taxes while still providing for your surviving spouse. The surviving spouse can receive income from the trust and potentially access principal, but the trust assets remain outside their taxable estate.
This strategy is particularly valuable in California because it allows you to preserve wealth across generations without triggering estate taxes. For example, a couple with a $30 million estate could structure their plan so that each spouse’s $13.61 million exemption shields assets from taxation, while the remaining amount passes to the surviving spouse or directly to children through the trust structure.
Irrevocable Life Insurance Trusts (ILITs) are another sophisticated tool. By placing life insurance policies in an ILIT, the death benefit proceeds can pass to beneficiaries free of income tax and outside your taxable estate. For California residents with significant estates, this can save substantial amounts in taxes.
These trusts require careful drafting and ongoing administration, but for estates subject to federal estate tax, the savings typically far exceed the cost of professional setup and maintenance.
Annual Gifting Strategies
You can give away $18,000 per person per year (in 2024) without using any of your exemption or filing a gift tax return. For a married couple, that’s $36,000 per recipient annually. Over a decade, a couple could gift $360,000 per child without any tax consequences—and without touching their exemption.
For higher-net-worth families, this annual exclusion gift strategy is a foundational piece of estate tax California planning. By systematically gifting to children, grandchildren, and even grandchildren’s trusts, you reduce your taxable estate over time while helping family members during your lifetime.
Qualified Charitable Distributions (QCDs) offer another gifting strategy. If you’re over 70½ and have an IRA, you can distribute up to $100,000 per year directly to charity, and that amount counts neither as income nor toward your taxable estate. This is particularly valuable for high-income California residents who are charitably inclined.
Real Property Considerations
California real estate deserves special attention in estate tax planning. Property values in California have appreciated dramatically, and this appreciation is included in your taxable estate at its full fair market value as of your death date. A home purchased for $500,000 thirty years ago might be worth $4 million today—and that full $4 million is part of your taxable estate.
However, heirs receive a “step-up in basis” when they inherit property. This means if you inherit real estate worth $4 million, your cost basis for tax purposes is $4 million, not what your parent originally paid. If you immediately sell the property, you owe no capital gains tax. This step-up in basis is one of the few tax breaks the IRS gives to heirs, and it’s worth understanding.
For those with significant California real estate holdings, strategies like capital gains tax planning on sale of property become critical. Understanding how to structure the sale of inherited property, especially if you’re a real estate professional, can save substantial taxes beyond just the estate tax itself.
Rental properties present additional complexity. The income they generate is taxable to your estate during the probate period, and the properties themselves are part of your taxable estate. Proper structuring through trusts or LLCs can help manage this complexity.
The 2026 Sunset Cliff
This is perhaps the most critical issue in estate tax California planning right now. The current exemption levels are scheduled to sunset on December 31, 2025. Unless Congress extends them (which is uncertain), the exemption will drop to approximately $7 million per individual on January 1, 2026.
This creates a massive planning opportunity—and a significant risk if you don’t act. If you have an estate between $7 million and $13.61 million, you have roughly one year to implement strategies to use your current exemption. After 2025, you’ll lose access to that exemption amount forever.
Families are increasingly considering “exemption-using” strategies in 2024 and 2025, such as making large gifts to trusts or creating grantor retained annuity trusts (GRATs) to lock in current exemption amounts. These strategies require professional guidance and must be implemented carefully, but the potential tax savings justify the effort.
Understanding the 2026 tax bracket changes is also relevant, as income tax rates may shift alongside estate tax changes, affecting your overall tax picture.
Working With Estate Professionals
Estate tax California planning is not a do-it-yourself project. You need a team: an estate planning attorney who understands California law, a CPA familiar with federal estate tax, and possibly a financial advisor. These professionals work together to create a comprehensive strategy tailored to your specific situation.
Your attorney drafts the legal documents—wills, trusts, powers of attorney, and healthcare directives. Your CPA ensures the strategy achieves your tax goals and works within federal and state law. Your financial advisor helps coordinate the implementation and ensures your assets are properly titled and positioned.
The cost of professional estate planning—typically $2,000 to $10,000 for a comprehensive plan—is trivial compared to the potential tax savings. A poorly structured $20 million estate could result in $3-4 million in unnecessary taxes. Professional planning pays for itself many times over.
If you need to understand what happens if you miss the tax deadline, it’s another reason to work with professionals who understand filing requirements and can help you navigate compliance issues.
Frequently Asked Questions
Does California have a state estate tax?
No. California does not impose a state-level estate tax or inheritance tax. However, California residents with significant assets are still subject to federal estate tax if their estate exceeds the federal exemption limit ($13.61 million per individual in 2024).
What is the federal estate tax rate in 2024?
The federal estate tax rate is a flat 40% on the portion of your estate that exceeds the exemption amount. This is applied to your total taxable estate, which includes all assets—real estate, investments, retirement accounts, and life insurance proceeds.
How can I reduce my estate taxes?
Several strategies can reduce estate taxes: using your annual gift exclusion, establishing bypass trusts or ILITs, using portability if married, making qualified charitable donations, and implementing exemption-using strategies before the 2026 sunset. The right approach depends on your specific situation and should be developed with professional guidance.
What happens to exemptions after 2025?
Unless Congress acts, the federal estate tax exemption will drop from $13.61 million per individual to approximately $7 million on January 1, 2026. This makes 2024-2025 critical years for implementing estate tax strategies.
Do I need an estate plan if my estate is under the exemption?
Yes. Even if your estate is below the federal exemption, you need an estate plan to address probate avoidance, healthcare decisions, guardianship of minor children, and management of assets if you become incapacitated. Estate planning is about more than just taxes.
How often should I review my estate plan?
You should review your estate plan every 3-5 years or whenever significant life events occur—marriage, divorce, birth of children or grandchildren, major asset changes, or changes in tax law. The 2026 sunset of exemptions is a good reason to review your plan now if you haven’t recently.
Summary
Estate tax California planning requires understanding that while your state doesn’t impose estate taxes, federal taxes can still devastate your family’s inheritance. With exemptions set to drop in 2026, now is the time to act. Whether through trusts, gifting strategies, life insurance planning, or other techniques, professional guidance can help you preserve wealth for your heirs.
The combination of California’s high real estate values and federal estate tax creates a perfect storm for many families. But with proper planning, you can navigate this complexity and ensure your legacy passes to your loved ones as efficiently as possible. Don’t wait—consult with an estate planning attorney and CPA to develop a strategy tailored to your specific situation.
