If you live in California you’re used to paying high taxes. But if you were concerned about California estate taxes, I have some good news for you.
California is one of the 38 states that do not impose their own estate tax. But don’t think that your entire estate may be tax-free. Even though California does not have an estate tax, the federal government will tax states above a certain exemption amount.
Table of contents
California estate tax exemption planning
It does not matter if you’re estate is large or small. It also does not matter where the decedent lived or where the assets were located. Since California has no estate tax, there will be no assessment.
The franchise tax board is the in charge of collecting any taxes. But fortunately with no estate tax you won’t have an issue with them.
California, of course, has very high taxes and you will pay ordinary rates on investment income, retirement accounts, and even assessed a real estate tax and sales tax.
How does the estate tax work?
It is just like it sounds. It is a tax levied on the net estate on a persons death. This tax is assessed before the funds are distributed out to the beneficiaries. Some people call it a death tax. But whatever you call it, it is only assessed in probably 1% of estates. That’s just because most people have assets that are below the annual estate exemption.
California gift tax and inheritance tax
California has generally gone easy on estates and beneficiaries. There is no gift tax and no inheritance tax. This is a large win for many people who live in the state or have assets in California.
The federal gift tax will still apply to people who reside in California. But again, there is an annual exemption amount before a tax return must be filed. A person can gift a friend, relative or even stranger up to $15,000 a year and will not have to pay any tax on the gift.
How to Legally Avoid the California Estate Tax
Since California does not impose an estate tax, you don’t have to worry much. But you still could get caught in the federal estate tax. Here are some planning techniques you can implement to reduce any estate tax liability. Make sure to consider the following:
- Qualified Personal Residence Trusts (QPRTs)
- Dynasty Trusts (and other complex structures)
- Grantor Retained Income Trusts (GRIT)
- Intentionally Defective Grantor Trust (IDGT)
- Donor-Advised Funds (for charitable giving)
- Charitable Gift Annuity
- Grantor Retained Unitrusts (GRUTs)
- 529 Plans
- Grantor Retained Annuity Trusts (GRATs)
- Crummey Trusts
- Minor Trusts
- Direct Medical and Tuition Payments
- Family Limited Partnerships (FLPs)
- Charitable Remainder Trusts (CRUT)
- Irrevocable Life Insurance Trust (ILIT)
- Gifts Below Annual Exemption
- Qualified Terminable Interest Property (QTIP)
If you inherit assets like a pension or retirement account you will have to pay tax on them. California will not assess tax against Social Security benefits like many other states do.
California does have a state sales tax which can range from approximately 7% to 10%. The base tax rate is one of the highest in the country. But local assessments can be a little bit lower.
California does have property taxes and they might average somewhere in the neighborhood of 1%. But thanks to proposition 13, when you buy a home it can only increase 2% a year. This means that California residents will typically pay lower property taxes based on assessed valuation than many other states.
If you have an estate in California or you are living in California and a beneficiary of an estate, make sure you review your situation with your financial advisor in addition to tax and legal professionals.
Even though few people pay estate tax, the rates are as high as 40% and can significant reduce any assets distributed to beneficiaries.
Serving clients in: San Francisco, San Jose, Palo Alto, Sunnyvale, Cupertino, Los Gatos, Menlo Park