Key Takeaways
Estate tax planning in California starts with a simple truth: even without a state estate tax, your heirs can still lose significant wealth to federal rules, income taxes, and capital gains. This article explains the differences between the federal estate tax, gift tax, and inheritance tax, then shows how California families actually get taxed when retirement accounts, real estate, and life insurance are transferred at death. You’ll learn why most estates won’t owe federal estate tax, when high-value assets create exposure, and how strategies like portability, trusts, gifting, life insurance planning, and charitable tools can protect your legacy. The goal is clarity, flexibility, and better outcomes.
Understanding estate tax planning in California starts with knowing which taxes actually apply. Many families assume the worst, but the reality is more nuanced—and often more favorable than expected.
Federal estate tax hits the deceased person's estate before heirs receive anything. The top rate is 40% on amounts exceeding the exemption. Inheritance tax, by contrast, is paid by the person receiving assets—not the estate itself. Gift tax applies to transfers made during your lifetime and shares a unified lifetime exemption with the estate tax. These federal estate tax basics matter because each tax has different triggers, rates, and planning opportunities.
Here's the good news: inheritance tax in California doesn't exist. California imposes neither a state estate tax nor an inheritance tax. However, 12 states plus D.C. do levy estate taxes, and 5 states have inheritance taxes. Oregon's threshold is just $1 million; Massachusetts sits at $2 million. If you own property in those states, you may still owe their taxes even as a California resident. An Orange County estate planning attorney can help you navigate multi-state exposure.
No state death tax doesn't mean tax-free inheritance. Heirs face income taxes on distributions from inherited retirement accounts like IRAs and 401(k)s. Every dollar withdrawn is taxed as ordinary income. Capital gains taxes also apply when heirs sell appreciated assets—stocks, real estate, or business interests—without proper planning. These ongoing taxes often exceed what the estate tax would have cost.
The step-up in basis is one of the most powerful tools to minimize estate taxes for heirs. When you inherit assets, your cost basis "steps up" to fair market value at the date of death. This eliminates capital gains on all appreciation during the decedent's lifetime. Long-term capital gains rates are 0%, 15%, or 20% depending on income. High earners also pay an additional 3.8% Net Investment Income Tax. Proper planning preserves this step-up benefit and keeps more wealth in the family.
The federal estate tax basics are straightforward once you understand the mechanics. Knowing what's included, what's deductible, and when filing is required helps families plan effectively.
The IRS counts almost all assets toward your taxable estate. This includes real estate, investment accounts, retirement accounts, life insurance death benefits, and business interests. Many California families underestimate their exposure because they forget life insurance. A $2 million policy you own on your own life adds $2 million to your taxable estate—even though your heirs receive it directly. Proper estate tax planning in California strategies address each asset category.
Several deductions can shrink your taxable estate substantially. The unlimited marital deduction allows assets passing to a U.S. citizen spouse to transfer tax-free. Charitable donations to qualified organizations are fully deductible. Outstanding debts, funeral costs, and administrative expenses also reduce the taxable amount. These deductions are essential tools to minimize estate taxes for heirs and should be part of every comprehensive plan.
An estate tax return (Form 706) is required when the gross estate exceeds the Basic Exclusion Amount—$13.61 million in 2024. But here's what many miss: you must file to elect portability even if no tax is owed. Skipping this step forfeits valuable tax benefits permanently. The return is due 9 months after death, with an automatic 6-month extension available. An Orange County estate planning attorney can ensure executors meet these deadlines.
Portability allows a surviving spouse to use the deceased spouse's unused exclusion (DSUE). If the first spouse used only $3 million of their exemption, the survivor can claim the remaining amount. However, the DSUE is not indexed for inflation once locked in—it stays fixed at the value when elected. Portability also does not apply to the Generation-Skipping Transfer tax exemption. Understanding these limits matters for families concerned about inheritance tax, California planning, and protecting multi-generational wealth.
Most California families will never owe federal estate tax. But high property values and substantial retirement accounts mean more households are closer to the threshold than they realize. Understanding your exposure is the first step in smart estate tax planning that California residents should prioritize.
The 2026 Basic Exclusion Amount is $15 million per individual—$30 million for married couples. Only approximately 0.14% of decedents' estates actually pay federal estate tax. The "One Big Beautiful Bill Act" passed in 2025 made this $15 million exemption permanent, ending years of uncertainty. These federal estate tax basics mean the vast majority of families can focus on income tax and capital gains planning instead.
California's high property values create hidden exposure. A $3 million home, $2 million in retirement accounts, and a $1 million life insurance policy already total $6 million for one spouse. Add investment accounts and business interests, and families approach the threshold faster than expected. The issue isn't any single asset—it's the combination. Families who want to minimize estate taxes for heirs must inventory everything, including assets they don't think about daily.
Tax law changes. Build flexibility into your estate plan with formula clauses that adjust automatically based on current exemption amounts. Review your plan whenever major tax legislation passes. An Orange County estate planning attorney can draft documents that work under multiple scenarios, protecting your family regardless of future political shifts.
Conduct a complete asset inventory, including life insurance face values—policies you own on your own life count toward your taxable estate. Consider strategies that shift future appreciation out of your estate, such as irrevocable trusts or strategic gifting. Waiting until you're clearly over the threshold limits your options. Proactive planning around inheritance tax, California alternatives, and federal exposure gives families the most flexibility and the best outcomes.
Several proven strategies can minimize estate taxes for heirs while preserving family wealth. The right approach depends on your assets, family situation, and goals. Here's how each strategy works.
Leaving everything to your spouse is easy—but potentially costly. All assets stack in the surviving spouse's estate, which may exceed the exemption when they die. The unlimited marital deduction simply postpones the tax problem rather than solving it.
Credit shelter trusts preserve the deceased spouse's exemption without relying solely on portability. QTIP trusts provide income to the surviving spouse while controlling who ultimately receives the assets. Both strategies are core estate tax planning California families use to protect multi-generational wealth.
Lifetime gifts receive carryover basis—the donor's original cost basis transfers to the recipient. Gifting highly appreciated assets locks in that low basis, creating significant capital gains liability when the recipient eventually sells. Understanding this tradeoff is essential to federal estate tax basics.
The annual gift tax exclusion is $19,000 per donee for 2025-2026. Married couples can split gifts, effectively giving $38,000 per donee. Direct payments to medical providers or educational institutions for tuition are unlimited and don't count against exclusions. These strategies systematically reduce your estate over time.
File IRS Form 709 for gifts exceeding the annual exclusion—even if no tax is due. Filing starts the 3-year statute of limitations on IRS valuation challenges. A completed gift requires three elements: intent, delivery, and acceptance. An Orange County estate planning attorney ensures your gifts are properly structured and documented.
The goal is straightforward: transfer assets now so all future growth happens outside your estate. Irrevocable trusts also add creditor protection and give you control over how and when beneficiaries receive distributions.
A SLAT allows one spouse to be a trust beneficiary while removing assets from the grantor's estate. This provides continued access to transferred assets while achieving estate tax reduction—a popular strategy for couples who aren't ready to give up control entirely.
Grantor Retained Annuity Trusts (GRATs) use the IRS Section 7520 rate—4.8% in August 2025—to calculate the taxable gift value. Qualified Personal Residence Trusts (QPRTs) transfer your home at a discounted value but are "bet-to-live" strategies. If you die during the trust term, the full value returns to your estate. These tools require precision to work properly.
Death benefits from policies you own are included in your taxable estate. A $2 million policy adds $2 million to your estate—even though proceeds go directly to beneficiaries. This surprises many families focused on inheritance tax California planning.
An ILIT owns the policy and receives the proceeds, removing them from your taxable estate entirely. The 3-year survival rule applies: if you transfer an existing policy to an ILIT, you must survive 3 years or the proceeds snap back into your estate. Crummey powers allow premium gifts to qualify for the annual exclusion.
Life insurance proceeds are income tax-free to beneficiaries under IRC §101(a). This creates immediate cash, so heirs aren't forced to sell real estate or business interests to pay taxes. For California families with illiquid wealth, this liquidity planning is essential.
Charitable deductions are among the most powerful estate tax tools. Every dollar going to qualified charities reduces your taxable estate by a full dollar—a 100% efficient deduction.
Charitable Remainder Trusts (CRTs) must pay 5-50% annually to non-charitable beneficiaries, with at least 10% of the initial contribution ultimately going to charity. Charitable Lead Trusts (CLTs) have no minimum or maximum payout restrictions; the remainder passes to the family. Both structures help minimize estate taxes for heirs while fulfilling philanthropic goals.
CRTs provide an income stream to the family first, with the remainder going to charity. CLTs flip this—charity receives income first, then family gets the remainder at a reduced gift tax value. Your priorities determine which structure fits best.
Family entities can support valuation discounts for lack of control and lack of marketability. A minority interest in a family LLC isn't worth the same as an equivalent percentage of the underlying assets because the holder can't force a sale or control decisions.
Professional appraisals document the fair market value and any applicable discounts. Typical real estate appraisal costs run $300-$600. Cutting corners here invites IRS challenges and potential penalties.
Document buy-sell agreements and formal succession plans. Consider installment sales or GRATs for transferring business interests to the next generation. An Orange County estate planning attorney experienced with business succession ensures these transactions withstand IRS scrutiny while keeping family relationships intact.
Even well-intentioned plans fail when details are overlooked. These common mistakes undermine efforts to minimize estate taxes for heirs and create unnecessary costs, delays, and family conflict.
Estate plans drafted under old exemption amounts often contain formula clauses that no longer work as intended. A plan designed when the exemption was $5 million behaves differently now that it's $15 million. These outdated formulas can disinherit a spouse, over-fund trusts, or create unintended tax consequences. Understanding federal estate tax basics means recognizing that plans need updates when the law changes—not just when your family situation changes.
Beneficiary designations on retirement accounts and life insurance override your will. An ex-spouse still named on a policy receives those proceeds regardless of what your estate plan says. Naming minors directly as beneficiaries may require expensive court-supervised guardianship until they reach adulthood. These designation mistakes are among the most common failures in estate tax planning California attorneys see—and among the easiest to prevent with regular reviews.
Gifting low-basis assets transfers the potential capital gains liability directly to the recipient. When they sell, they pay tax on all appreciation since they originally purchased the asset. Holding appreciated assets until death provides a step-up in basis, eliminating those embedded gains. This distinction is critical for inheritance tax California planning. Gift cash or high-basis assets; keep appreciated property until death.
Transferring an existing life insurance policy to an Irrevocable Life Insurance Trust triggers the 3-year rule. If the grantor dies within three years, the full death benefit is included in their taxable estate—completely defeating the purpose. Having the ILIT purchase a new policy from the start avoids this trap. An Orange County estate planning attorney structures these transactions correctly from day one.
Heirs must document Fair Market Value at the date of death to establish their stepped-up basis. Without proper appraisals, the IRS may deny the step-up benefit, leaving heirs with unexpected capital gains taxes. Weak records also fuel family disputes about asset values and distributions. Professional appraisals and thorough documentation protect both tax benefits and family harmony.
Tax rules change, assets grow, and small mistakes—like outdated beneficiaries, low-basis gifts, or life insurance owned the wrong way—can cost your family far more than expected. The right plan coordinates trusts, beneficiary designations, liquidity, and documentation so your heirs keep more and stress less. At Parker Law Offices, we help California families build flexible, tax-aware strategies that fit real life—homes, retirement accounts, businesses, and blended families included. If you’re unsure where you stand or want to plan, let’s map it out together. Book an appointment with us today.
