Estate Taxes in California: How They Impact Your Estate Plan

Understanding Estate Taxes in California: How They Impact Your Estate Plan

When creating an estate plan in California, understanding how various taxes work is essential for protecting your legacy and minimizing financial burdens on your heirs. This guide covers key tax considerations—estate tax, inheritance tax, and capital gains tax—along with the important role of the step-up in basis. If you’re looking to optimize your estate plan in California, here’s what you need to know.

1. What Is the Estate Tax and Who Pays It?

An estate tax is a federal tax on the value of a person’s assets at the time of their death. As of 2024, the federal estate tax exemption is $13.61 million per person. This means only estates exceeding this amount are subject to federal estate taxes.

➡️ California does not impose a state estate tax, so most Californians only need to be aware of the federal threshold.

Estate Planning Tip: If your estate is approaching the federal limit, consider gifting strategies or irrevocable trusts to reduce taxable value. Give us a call to book a consultation. 

2. Is There an Inheritance Tax in California?

An inheritance tax is a tax paid by the beneficiary after receiving money or property.

✅ Good news: California does not have an inheritance tax.

However, beneficiaries who live in states with inheritance taxes (e.g., Pennsylvania, Nebraska, Iowa) may still owe taxes depending on their relationship to the deceased.

3. Capital Gains Tax and the Step-Up in Basis: How It Saves Your Heirs Money

A capital gains tax is applied when you sell an asset (like real estate or stock) for more than its purchase price. The difference between the purchase price (called the cost basis) and the sale price is considered a capital gain, and it’s taxable.

Here’s where the step-up in basis is critical:

🟢 When you inherit an asset, the cost basis “steps up” to its fair market value at the date of the original owner’s death.

Example: Your mother bought a home for $100,000. When she passed, it was worth $600,000. Your new basis is $600,000. If you sell it for $600,000, you pay no capital gains tax.

Estate Planning Tip: Holding appreciated assets until death (instead of gifting them during your lifetime) can preserve this tax benefit for your heirs. Call us to book a consultation to learn more.

How to Use This Knowledge in Your California Estate Plan

Understanding how taxes impact your estate allows you to:

• Reduce or avoid unnecessary taxes through strategic planning.
• Preserve family wealth for future generations.
• Structure trusts, gifts, and distributions to align with tax laws and long-term goals.

A California estate planning attorney can help you design a plan that uses the step-up in basis effectively, minimizes exposure to capital gains, and navigates the estate tax exemption.

Plan Smarter: Work With an Estate Planning Lawyer in California

At our firm, we guide individuals and families through the complexities of estate planning with a focus on asset protection, tax efficiency, and legacy planning. Whether you’re planning a simple will or a complex trust-based estate, we can help you build a strategy that maximizes the value you leave behind.

📞 Contact us today to schedule a consultation and start building a plan that reflects your values and safeguards your legacy.