Latest Facts and News:
- California remains one of 38 states without a state-level estate tax as of 2024
- Federal estate tax exemption increased to $13.61 million per individual for 2024
- Recent attempts to introduce a California estate tax have failed to gain traction
- Six states still impose inheritance taxes, but California is not one of them
California does not have any estate tax of its own. However, it is important to understand estate planning to ensure the security of your estate. In response to the question, “Does California have an estate tax?” the reply would be, “No.” However, you shouldn’t ignore federal estate taxes and many other financial parameters.
Even though California does not have its own estate tax, it’s very important to understand all aspects of estate planning to protect and pass on your assets smoothly.
In this guide, we will discuss estate and inheritance taxes in California and strategies for arranging the estate plan concerning federal estate issues, gifts, and future uncertainties that can impact your planning.
Understanding Estate and Inheritance Taxes in California
Having a basic understanding of estate and inheritance taxes is necessary to plan your estates properly. But does California have an estate or inheritance tax? First, let’s understand what estate tax and inheritance taxes are and how they function.
What is an Estate Tax in California?
An estate tax is an amount charged on the total value of an owner’s assets prior to handing them over to the successors. Another name for this tax is the “death tax.” It is assessed depending on the value of the property when an individual dies. Some states have their own estate taxes, but California does not have a state-level estate tax.
What is an Inheritance Tax in California?
Unlike estate tax, which is imposed on the overall value of an estate, an inheritance tax is imposed on the person who receives the estate of the deceased. It is determined by the amount of the inheritance as well as the relationship to the deceased person.
Federal Estate Tax and Its Impact on Californians
California residents should understand the federal estate tax better to plan their estates in a better way. Let us see it in detail:
Federal Estate Tax Exemption for 2025
Commencing January 1, 2025, the federal estate and gift tax exemption will increase to 13.99 million dollars per individual, moving up from 13.61 million dollars in 2024. This denotes that if the overall value of your estate is below this threshold, the federal government will not be able to tax you. This exemption doubles for married couples which allows them to save up to $27.98 million from federal estate taxes.
However, this increased exemption is not permanent. The exemption amount will revert back to $5 million plus changes for inflation alterations by December 31, 2025. When these changes occur, there will be a major impact on estate planning; hence, planning must be done accordingly.
Federal Estate Tax Rates:
| Taxable Amount | Estate Tax Rate |
| $1 – $10,000 | 18% |
| $10,000 – $20,000 | 20% |
| $20,000 – $40,000 | 22% |
| $40,000 – $60,000 | 24% |
| $60,000 – $80,000 | 26% |
| $80,000 – $100,000 | 28% |
| $100,000 – $150,000 | 30% |
| $150,000 – $250,000 | 32% |
| $250,000 – $500,000 | 34% |
| $500,000 – $750,000 | 37% |
| Over $750,000 | 40% |
Portability for Married Couples
A married couple can increase their estate tax exemption by using portability. Portability lets the other spouse use any part that is unused of their deceased spouse’s estate and gift tax exemption.
How Portability Works:
- First Spouse’s Exemption: At the death of the first spouse, everything can be passed on to the living spouse tax-free because their estate will qualify for the unlimited marital deduction. The exemption never used will then be applied to that of the surviving spouse as long as the estate of the first to die is below the exemption amount.
- Surviving Spouse’s Exemption: The surviving spouse can add the deceased spouse’s unused exemption to their own and increase their total exemption. For example, if the first spouse used $5 million of their exemption, $8.99 million would be left. The surviving spouse can add this $8.99 million to their own $13.99 million exemption and then the total would be $22.98 million.
Does California Have an Inheritance Tax?
No, California does not have an inheritance tax. This means the beneficiaries do not have to pay state taxes on the assets they inherit when someone passes away. This is a big benefit for California residents because it lets the heirs get their inheritance without extra burden.
States That Impose Inheritance Taxes
While California does not have an inheritance tax, six states currently do:
- Iowa: Up to 6%
- Kentucky: Up to 16%
- Maryland: Up to 10%
- Nebraska: Up to 15%
- New Jersey: Up to 16%
- Pennsylvania: Up to 15%
Estate Planning Strategies for Californians
Estate planning is important for Californians who want to reduce taxes and make sure their assets are passed on as they wish. By using different strategies, individuals can reduce their federal estate tax burden and make sure their loved ones are well taken care of.
Here are two strategies to do so:
Utilizing Trusts to Minimize Tax Liability
Trusts serve as a great tax tool in estate planning because they can reduce the federal estate tax, and they allow the person to take full control of their assets and how they are transferred after their death. Let us see the different types of trusts:
Irrevocable Life Insurance Trust (ILIT)
- ILIT keeps life insurance money out of the taxable estate which helps reduce estate taxes.
- After the trust has been set up, it will then own the life insurance policies in question. When you die, your beneficiaries will receive the amount of your policy, free of any death taxes.
Charitable Remainder Trust (CRT):
- A CRT lets an individual donate his/her assets into the trust and earn income for the whole lifetime. Then you can give the remaining value to a charity when you pass away.
- It helps in avoiding taxes on assets that have increased in value when you sell them in the trust.
Qualified Personal Residence Trust (QPRT):
- A QPRT allows you to transfer your home to a trust for a certain number of years, during which time you may reside in it.
- The property goes to your beneficiaries after the term completes, possibly at a lower gift tax value.
Grantor Retained Annuity Trust (GRAT):
- It involves putting your appreciating assets into a trust and getting annual payments for a fixed term.
- After the term ends, the remaining assets go to your beneficiaries, possibly reducing gift and estate taxes.
Generation-Skipping Trust (GST):
- In GST, you can bypass your children’s estates and transfer assets directly to your grandchildren.
- Steps like these are taken towards maintaining wealth through generations by cutting away from extra taxes at each level.
Gifting and Other Tax-Minimizing Techniques
Gift Tax Annual Exclusion
As of 2025, the limit of gifts in one year that can be given without gift taxes is $19,000 per person. For married couples, the limit is $38,000 for one person. According to this rule, a couple having three kids could gift $114,000 per year without paying gift taxes.
Lifetime Gift Tax Exemption:
The lifetime gift tax exemption is $13.99 million apart from the yearly limit, as of the year 2025. This lets you transfer large amounts without paying taxes right away, which is helpful before the exemption limits change after 2025.
Making Educational and Medical Payments:
Paying directly for someone’s education or medical bills doesn’t count as a taxable gift. This covers tuition or medical bills paid directly to institutions.
Contributing to 529 College Savings Plans:
These plans let your contributions grow without taxes if they are used for eligible education costs. Many states offer tax deductions for contributions to make these plans a great choice for giving educational gifts.
Charitable Contributions:
Charitable giving is not just confined to supporting the good causes of society; it also narrows the taxable estate. With donations, you can claim tax deductions immediately and also reduce the size of the taxable estate.
Potential Future Changes to California Estate Tax Laws
As of January 2025, California does not impose estate tax. However, it is good to stay updated on new laws that can affect your estate plan.
Past Proposed Legislation and Potential Changes
- There was an estate tax that ceased in the year 2005 in California. In 2005, the state removed its estate tax to match the federal estate tax laws. Since then, there have been proposals to bring back a state-level estate tax but none of them have been approved.
- In 2020, a bill was introduced that proposed the creation of a state estate tax like the federal estate tax. It was set to target estates over $3.5 million, starting at 0.8% and going up to 16% for estates over $10 million. Sadly, it was never made a law.
- California has also thought about making a state death tax credit, that would give residents a credit on their state income taxes based on how much they paid in federal estate taxes.
Impact on Estate Planning
Let us see if California were to reintroduce an estate tax, how it could affect your estate planning:
- Tax Liability: Your estate may face extra taxes after you pass which could reduce what your beneficiaries receive.
- Planning Strategies: You might need to update your estate plans like changing trusts or giving more gifts to reduce taxes.
- State-Specific Considerations: California’s estate tax laws may differ from federal laws so you might need a different strategy for estate planning.
Tax Liability
Your estate may face extra taxes after you
pass which could reduce what your beneficiaries receive.Planning Strategies
You might need to update your estate
plans like changing trusts or giving more gifts to reduce taxes.State-Specific Considerations
California’s estate tax laws may differ from federal
laws so you might need a different strategy for estate planning.
Conclusion
Even though no estate or inheritance tax is currently enforced in the state of California, it is very important for residents to keep themselves updated with the federal estate tax laws that will affect their estate planning. The Federal Estate Tax Exemption Amount is $13.99 million per person which is made effective in 2025, and hence any estates not more than that will be free of paying federal taxes. Hence, it’s important to have an understanding of these rules for a better estate plan.
To ensure all assets go on to the intended loved ones and heirs, it is important to plan the estate well before anything happens. This involves using strategies, trusts, gifting techniques, and staying informed. Planning ahead with an estate planning attorney, SWAT Advisors helps make sure your assets go to your heirs as you want with low taxes.
FAQ's
California does not have its own estate tax, which means that there is no state-level estate tax on the assets transferred after death. This is unlike some states that have a tax on estates over a certain value. While there’s no state estate tax, the federal government imposes taxes on estates above the exemption limit.
No, California does not have an inheritance tax. Beneficiaries do not have to pay state taxes on the assets they inherit. However, they may have to pay federal estate taxes if the estate exceeds the exemption limit, and they could also face capital gains taxes when selling inherited property.
The estate tax is charged on the total value of a person’s estate before it is passed to heirs. On the other hand, the inheritance tax is charged to the beneficiaries based on what they inherit and how close they are to the deceased. California doesn’t have an inheritance tax, but some other states do.
Even though California doesn’t have an estate tax, it’s still important to minimize federal estate taxes. You can do this by using trusts, giving gifts during your lifetime, and taking advantage of annual gift limits and lifetime exemptions. Trusts like irrevocable trusts, charitable trusts, and gifting assets can help in lowering your taxes.
As of 2025, California doesn’t have its own estate tax, but there have been discussions about bringing it back. A bill was introduced in 2020 but it did not pass. Lawmakers are still considering different ways to solve budget problems, so it’s important to keep an eye on any future changes that could affect estate planning.
