How Are Estates Taxed in California?

Maneuvering through the death of a loved one is never an easy task. California, like the majority of U.S. states, does not impose a state-level estate tax, but it is important to be aware of how this tax works at a federal level. Understanding how estates are taxed in California is crucial for moving as smoothly and quickly as possible through this process. It is essential to have a trusted California probate lawyer help you through the daunting and often complex journey of estate planning.

What Is Estate Tax?

Estate tax is a specific tax levied on the total value of an estate belonging to a deceased individual before the distribution of assets to their heirs. At its core, an estate is made up of the property owned and any entities the decedent had a vested interest in at the date of their death.

Property may consist of real estate or business interests, trusts, insurance, collectibles, cash, and other possible assets. The primary goal of estate tax is to incentivize wealthy individuals to directly hand these resources down to the next generation by avoiding further taxation on future transfers of funds.

The Difference Between Estate Tax and Inheritance Tax

Throughout one’s life, a legacy is built. Many individuals want that legacy handed down and protected. Consider estate tax versus inheritance tax. Each one affects what is left to heirs in different ways. It is wise to know how each works as you plan for the future.

1. Estate Tax: An estate tax is imposed on the entire estate upon an individual’s death and is paid by the estate itself before distributions to beneficiaries begin. The total value is comprised of cash, collectibles, assets, trusts, property, and investments.
2. Inheritance Tax: An inheritance tax is levied against heirs, or those who will receive a distribution of said estate based on what is inherited and the relationship the heir has with the deceased. The revenue collected from this tax is given to state governments in certain states where this tax is implemented and is paid by the beneficiary.

Federal Estate Tax

On the federal level, estate tax offers an important source of revenue, contributing to governmental programs such as education, health care, and national defense. Currently, as of 2024, an individual only faces federal estate tax if their estate is worth a total of $13.61 million or, in the cases of married couples, a joint exemption of $27.22 million.

The range of federal estate tax rates is anywhere from 18% to 40%. If an estate is below the exemption threshold, no federal estate tax is required. For example, if an individual’s estate is worth a total of $12 million, or if an estate belonging to a married couple totals $26 million, no federal estate tax is implemented.

Exemptions and Deductions That May Apply

As there are no estate taxes required by the state of California, only the exemptions and deductions offered for federal estate taxes apply. They are as follows:

1. Annual Gift Tax Exclusion: The owners of the estate are allowed to give a certain amount of money to others without triggering gift tax or decreasing their estate tax exemption.
2. Charitable Deduction: This allows for a deduction of the value of the property or money left to an acceptable charitable organization from the value of the decedent’s estate.
3. Marital Deduction: This is used to postpone estate tax until the surviving spouse dies, as it allows unlimited assets to be transferred to them free of federal estate tax.
4. Family Business Deduction: Qualifying estates may be able to lessen the value of eligible family-owned businesses for estate tax purposes.

FAQs

Q: How Much Money Can an Estate Be Worth Without Paying Estate Tax in California?

A: If an individual’s estate does not cross the threshold of a net worth of $13.61 million, they are not required to pay a federal estate tax in the state of California or anywhere else in the US. If a married couple’s estate does not surpass $27.22 million, no estate tax will be levied. Any and all federal estate taxes are taken out before the money is received by the heirs of the decedent.

Q: What Is the Estate Tax Rate in California?

A: The estate tax rate in California is, as of 2024, 0%. While California does not currently impose a state-level tax, keep in mind that the federal government does. Therefore, Californians must be aware of the regulations at the federal level. The cross-over between both state and federal law in this arena is crucial to understand, as the possibility of future state legislation on a state-level estate tax could come into play.

Q: How Do I Avoid Estate Taxes in California?

A: Strategic gifting is one way to avoid estate taxes in California. There are two possible ways to do this:

1. Annual Gift Tax Exclusion: A gift of a certain amount can be given by an individual to any number of people without inviting gift tax.
2. Lifetime Exemption: There is a lifetime exemption limit that goes beyond annual exclusions. Gifts that surpass this limit will lower the taxable estate value but may also incur separate gift taxes.

Another way is to employ trusts.

Q: How Is an Inherited House Taxed in California?

A: In the state of California, as there is no inheritance tax, you will not owe such taxes on an inherited property. However, if you decide to sell the house, there is a good likelihood of owing a capital gains tax on any value of the property that has risen since the time of your relative’s passing. However, there are strategies that can be put in place to mitigate this liability.

Contact an Experienced Estate Planning Lawyer

It’s vital to protect your legacy for generations to come. Understanding how estate taxes operate in California is a major step toward reducing stress in these trying times. Contact the team at Kevin Rice, Attorneys at Law, for extensive support as you navigate your journey of estate planning, administration, or litigation. It is our intent to be of service to you and your family as you work to protect your hard-earned assets and property.