Beat California Estate Taxes: Smart Estate Planning
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“blog_title”: “Estate Taxes for Californians: Smart Estate Planning”,
“blog_content”: “
Estate Taxes for Californians: Smart Estate Planning
Does California Have an Estate Tax?
California does not impose its own estate or inheritance tax under current law. See the California Franchise Tax Board for confirmation (FTB).
Why Federal Estate Tax Still Matters
The federal estate tax applies above a threshold that the IRS adjusts periodically and that may change if federal law changes. If your taxable estate (including certain lifetime gifts) exceeds the federal limits, your estate could owe tax. Planning early helps you use available exclusions, deductions, and elections to minimize exposure (see IRS Estate and Gift Tax FAQs).
Key Strategies to Reduce Estate Tax Exposure
- Annual exclusion gifts: Use annual exclusion gifts to shift future growth out of your estate while keeping administration simple.
- Use the lifetime exclusion strategically: Coordinate spousal planning and ownership to align with your overall tax and family goals.
- Elect portability when appropriate: A surviving spouse may use a deceased spouse’s unused exclusion (DSUE) if a proper and timely Form 706 is filed; the IRS also offers streamlined relief for late elections in certain non-taxable estates (see IRS FAQs and Rev. Proc. 2022-32).
- Life insurance planning: Consider an irrevocable life insurance trust (ILIT) to keep policy proceeds outside your taxable estate and provide liquidity for expenses. Proper structuring and administration are critical.
- Trusts for growth assets: Grantor trusts, SLATs, GRATs, QPRTs, and similar vehicles can remove appreciation from your estate and help “freeze” value, subject to technical rules and risks.
- Valuation planning: When supported by qualified appraisals and documentation, interests in closely held businesses or family entities may qualify for discounts; these are fact-specific and subject to IRS review.
- Charitable strategies: Charitable remainder or lead trusts and outright gifts can reduce taxable estates while meeting philanthropic goals.
- Retirement accounts: Coordinate beneficiary designations with trust provisions to balance income-tax, estate-tax, and asset-protection considerations.
- Community property review: In California, confirm titling and any transmutation agreements to preserve tax and non-tax benefits.
- Built-in flexibility: Consider disclaimers and carefully drafted powers to allow post-death tax optimization.
California Community Property and Basis Planning
California’s community property system can provide a basis adjustment (often called a “step-up” or “step-down”) for both halves of community property at the first spouse’s death if statutory requirements are met. Proper characterization of assets, documentation, and coordination with any trusts are essential to preserve these benefits while meeting non-tax goals. See IRS Pub. 555 (Community Property) and the FTB community property guidance.
Trusts That Fit California Families
- Revocable living trusts: Help avoid probate for assets properly titled to the trust, maintain privacy, and organize incapacity planning.
- Credit shelter and marital trusts: Optimize use of exclusions, manage asset protection, and control disposition—especially in blended families.
- Dynasty and GST planning: Longer-term trusts can benefit multiple generations while managing transfer taxes. Note that California may tax a trust’s income based on fiduciary/beneficiary residency and other factors, even if the trust is sited in another state (see FTB: Estates and Trusts).
- Special needs trusts: Protect means-tested benefits for disabled beneficiaries while providing supplemental support.
Business Owners and Real Estate Investors
Founders and property owners can benefit from early transfers of growth assets, recapitalizations into voting/non-voting equity, and the use of family entities. Coordinated succession plans—including buy-sell agreements, insurance funding, and governance—can reduce the risk of forced sales to pay taxes or expenses.
Plan Administration and Compliance
Effective plans require accurate valuations, timely tax elections, and good records. Estates may need to file a federal estate tax return, and a surviving spouse often should file even when no tax is due to preserve portability (generally via Form 706). The IRS provides streamlined relief for certain late portability elections in non-taxable estates (Rev. Proc. 2022-32; see also IRS FAQs). Work closely with your CPA and financial advisor to handle trust accounting, appraisals, and required filings.
Practical Tips
- Calendar key deadlines for Form 706 and state filings to preserve elections.
- Keep a central file with trust documents, deeds, appraisals, and beneficiary designations.
- Review titling for community vs. separate property and document any transmutations.
- Stress-test your plan for liquidity needs, including taxes, debts, and administration costs.
Estate Planning Checklist
- Inventory assets, liabilities, and digital accounts.
- Confirm California community property characterization and title.
- Update beneficiary designations to align with your trust plan.
- Model federal estate tax exposure and portability benefits.
- Consider trusts (credit shelter, marital, ILIT, SLAT/GRAT) where appropriate.
- Coordinate with CPA on valuations and potential discounts.
- Establish a plan for business succession and real estate entities.
- Schedule periodic reviews and after major life events.
FAQ
Does California have an estate or inheritance tax?
No. California currently has neither. Federal estate tax may still apply to larger estates. See the FTB.
What is portability for spouses?
Portability lets a surviving spouse use a deceased spouse’s unused federal exclusion if a timely and proper Form 706 is filed. Limited late-election relief exists under Rev. Proc. 2022-32.
Do community property assets get a full step-up in basis?
Often yes, both halves may receive a basis adjustment at the first spouse’s death if requirements are met. See IRS Pub. 555.
Are trusts taxed by California?
California may tax a trust’s income depending on fiduciary or beneficiary residency and other factors. See FTB guidance.
Stay Ahead of Changing Laws
Federal exclusion amounts and related rules change over time due to inflation adjustments and possible legislative sunsets. California currently has no estate or inheritance tax, but proposals can recur. Periodic reviews—especially after life events or significant asset growth—help keep your plan aligned with current law and your goals.
Next Steps
- Take inventory of assets, liabilities, and current beneficiary designations.
- Confirm how property is titled under California’s community property rules.
- Model potential estate tax exposure under different scenarios.
- Consult an estate planning attorney to implement trusts, gifting, and tax elections tailored to your family.
Ready to protect your legacy? Contact us to discuss a California-focused estate plan.
Disclaimer (California): This post provides general information based on California and federal law and is not legal or tax advice. Laws change and outcomes depend on your facts. Consult a qualified California attorney and tax advisor before acting.
“,
“blog_excerpt”: “California currently has no separate state estate or inheritance tax, but larger estates may still face federal estate tax exposure. With thoughtful planning—lifetime gifts, portability elections, trusts, charitable strategies, and basis planning—you can reduce taxes and streamline wealth transfers for your family.”,
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“blog_category”: [“Estate Planning”, “Tax Law”, “California Law”],
“blog_type”: “Educational”
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- Preserve documents, photos, and communications immediately.
- Avoid recorded statements to insurers without counsel.
- Track expenses, lost income, and impacts as they occur.