Protect Your Heirs: California Trusts & Estate Taxes
Learn how California residents can use revocable and irrevocable trusts to streamline inheritance, reduce potential federal estate tax exposure, and protect loved ones. Understand probate, community property rules, portability, and common planning strategies.
Why Estate Planning Matters in California
California families face a unique mix of issues: high property values, community property rules for married couples, and a court-driven probate process that can be time-consuming and public. A well-structured estate plan can help your heirs receive assets more efficiently, keep personal matters private, and align transfers with your wishes. For an overview of California probate, see the Judicial Branch’s Self-Help Probate resources.
Does California Have an Estate or Inheritance Tax?
California currently does not impose a separate state-level estate or inheritance tax. California’s former “pick-up” estate tax (tying state tax to the now-defunct federal credit for state death taxes) is inoperative because the federal credit is no longer allowed for decedents dying after 2004. See Cal. Rev. & Tax. Code § 13302 and 26 U.S.C. § 2011. California residents are still subject to federal estate and gift tax rules; the IRS provides an overview here: Estate and Gift Taxes.
Trusts 101: Revocable vs. Irrevocable
Revocable living trusts are the backbone of many California plans. During life, you can amend or revoke them, and assets are typically treated as your own for income and estate tax purposes. Their primary benefits are probate avoidance, privacy, and easier incapacity management via successor trustees.
Irrevocable trusts restrict your ability to change terms but can remove assets from your taxable estate, support creditor protection in certain structures, and implement wealth-transfer goals. The right choice depends on your priorities for control, tax efficiency, and asset protection.
Probate Avoidance and Why It Matters
Assets titled in a properly funded revocable trust generally avoid probate, allowing faster, more private administration and continuity if you become incapacitated. In California, assets left outside the trust may require court petitions before they can be distributed. See California Courts: Probate for process details and small-estate alternatives. A coordinated funding plan—deeds for real property, updated account titling, and beneficiary designations—helps keep your plan on track.
Tip: Fund Your Trust Early
Retitle real estate, brokerage accounts, and closely held interests into your trust now to avoid gaps later. Keep a simple asset list and review it annually.
Community Property and Step-Up in Basis
Many married California couples own community property. Under 26 U.S.C. § 1014, qualifying community property generally receives an adjustment to fair market value at the first spouse’s death, and if the requirements of § 1014(b)(6) are met, both halves can receive a step-up (or step-down) in basis. Accurate titling, recordkeeping, and confirmation that the asset is community property at death are critical to preserve tax benefits and avoid disputes.
Federal Estate and Gift Tax Basics
Federal law provides a unified estate and gift tax system that includes a lifetime exclusion, annual exclusion gifts, and portability. “Portability” can allow a surviving spouse to use a deceased spouse’s remaining exclusion if a timely election is made on a federal estate tax return (Form 706), even when no tax is otherwise due. See 26 C.F.R. § 20.2010-2 and the IRS overview of Estate and Gift Taxes. Thresholds and technical rules change over time, so plans should build in flexibility.
Common Trust Strategies for California Families
- Revocable Living Trust: Core tool for probate avoidance, privacy, and incapacity planning.
- Marital/Bypass (AB/ABC) Planning: Can preserve a deceased spouse’s exclusion and manage asset growth for blended or high-net-worth families.
- Irrevocable Life Insurance Trust (ILIT): Can remove policy proceeds from the taxable estate and control beneficiary distributions.
- Grantor Trusts and Sales to Trusts: Advanced wealth-transfer strategies that shift appreciation outside the estate while retaining grantor income-tax characteristics.
- Special Needs Trusts: Helps protect public benefits eligibility for a disabled beneficiary while providing supplemental support.
- Charitable Trusts: Combine philanthropy with income streams and potential tax advantages.
Real Estate and Proposition 19 Considerations
California’s property tax rules affect how assessed value and exclusions apply when real property passes to heirs. Proposition 19 (effective 2021) significantly limited parent–child exclusions; treatment of a primary residence differs from other property, and specific timing and value rules apply. Review the California State Board of Equalization Prop 19 fact sheet before transferring a home or rental property into or out of trusts or to children.
Coordinating Beneficiary Designations
Retirement accounts, life insurance, and payable-on-death accounts pass by beneficiary designation, not by your will or trust. Align these designations with your trust-based plan—especially when using subtrusts for minors, special needs beneficiaries, or spendthrift protections—to avoid unintended outcomes.
Key Documents Beyond the Trust
- Pour-Over Will: Captures assets not titled in the trust.
- Durable Power of Attorney: Authorizes financial actions during incapacity.
- Advance Health Care Directive and HIPAA Release: Guides medical decisions and access to information.
- Certification/Abstract of Trust: Facilitates dealings with banks and escrow without disclosing full trust terms.
California Estate Planning Checklist
- Establish a revocable living trust and sign a pour-over will.
- Retitle real estate and key accounts into the trust.
- Update beneficiary designations to align with the plan.
- Document community vs. separate property status.
- Create financial power of attorney and health care directive.
- Review life insurance ownership; consider an ILIT if appropriate.
- Evaluate portability and whether to file Form 706 when a spouse dies.
- Assess Prop 19 impacts before transferring real property.
- Calendar a review every 2–3 years or after major life events.
FAQ
Does California have its own estate or inheritance tax?
No. California currently has no separate estate or inheritance tax, though federal estate and gift tax rules still apply to residents.
Will a revocable trust reduce my income or estate taxes?
Generally no for taxes; a revocable trust is tax-neutral during life and typically included in your taxable estate. Its main benefits are probate avoidance, privacy, and incapacity management.
Do both halves of community property get a step-up in basis?
Often yes, if statutory requirements are met under 26 U.S.C. § 1014(b)(6). Proper titling and proof of community status matter.
Should a surviving spouse file a portability election?
Often advisable, even if no tax is due at the first death, to preserve the deceased spouse’s unused exclusion for future use.
How often should I review my plan?
Every 2–3 years or after major life, asset, or law changes.
When to Review Your Plan
Revisit your plan after major life events—marriage, divorce, birth or adoption, death of a beneficiary, significant changes in wealth, a home purchase or sale, or tax law changes. Regular reviews help ensure titles and designations stay current and tax strategies remain effective.
How We Help
We design and implement California-centered plans that integrate revocable trusts, targeted irrevocable strategies, real estate considerations, and coordinated beneficiary designations. Our team can manage funding checklists, trustee guidance, and tax elections to protect your heirs and your intent. Contact us to get started.
Disclaimer (California): This information is for general educational purposes for California residents and references federal law. It is not legal or tax advice. Laws and thresholds change, and outcomes vary by situation. Consult a California-licensed attorney or qualified tax professional about your circumstances.