Unmasking the True Estate Tax Rate in California: High Earners’ Guide to Keeping More Wealth

The words “estate tax” can freeze high-net-worth Californians in their tracks. Urban legends about the Golden State’s unique estate tax—10%, 13%, even 15%—run rampant at wine country parties and executive boardrooms alike. In truth, the estate tax rate in California is a nuanced issue that’s become both misunderstood and weaponized. The real reason it matters: what you don’t know is likely to quietly erode $1M–$12M+ of family wealth. This guide clears up persistent myths for affluent individuals and explains how federal and California rules combine, including practical strategies to outmaneuver unnecessary taxation.

Quick Answer: What Is the Actual Estate Tax Rate in California?

As of 8/6/2025, California imposes no standalone state estate tax. Only the federal estate tax applies—and only for estates exceeding the federal exemption ($13.61M/person for 2025). But unless your assets are specifically sheltered, all amounts over this threshold face a progressive federal rate of up to 40%. Many wealthy families pay $3M–$12M+, often needlessly, due to poor planning or common misconceptions.

This information is current as of 8/6/2025. Tax laws change frequently. Verify updates with the IRS or California FTB if reading this later.

How Estate Taxes Work for High-Net-Worth Californians

Let’s break down exactly where risk—and opportunity—exist:

• Federal Estate Tax Only: California residents must only contend with the IRS’s estate tax, not a state version.
• 2025 Federal Exemption: $13.61M per individual (married couples: $27.22M) (IRS source).
• Excess Taxed at 40%: Amounts above the exemption are taxed at a flat 40% federal rate.
• Risk of Federal Law Sunset: Exemption will revert to ~$6.8M/person in 2026 unless Congress acts. Double taxation risk: if California creates its own estate tax (pending proposals), rates could reach 12–16% on top.

So, a $20M estate for a single individual yields: $20M – $13.61M = $6.39M taxed. Federal estate tax: 40% × $6.39M = $2,556,000. For married couples, double exemption may apply—but only with correct portability election (see below).

Most Overlooked Tax Trap: The Portability Misstep

Here’s the mistake that costs California’s wealthy families more than any other: failing to properly claim the deceased spouse’s unused exemption—known as “portability.” If not filed with the IRS within 5 years via Form 706, the second spouse cannot claim the unused federal exemption, resulting in millions more lost to tax.

Pro Tip: Even if your spouse’s estate is under the exemption, always file IRS Form 706. Most estate attorneys and even CPAs miss this step, costing families $5M–$14M+ in preventable estate tax. (See IRS guidance.)

Advanced Asset Strategies: How High-Net-Worth Californians Actually Lower Their Exposure

If your net worth is above $10M (or expected to be), the only way to avoid the federal estate tax is via proactive planning. Here are proven strategies used by KDA and other advanced firms:

1. Dynasty Trusts (Intentionally Defective Grantor Trusts, Spousal Lifetime Access Trusts, etc.): Transfer asset ownership out of your estate while retaining indirect control or access. Example: Shifting $30M into a dynasty trust saves $12M+ in future estate tax (including compounding growth avoidance). Various forms carry specific rules—consult premium advisory services.
2. Annual Gifting and Lifetime Gift Exemptions: Use the $18,000-per-person annual gift exclusion and lifetime exemption in parallel. With 5 heirs, a couple can move $180K/year tax-free, and $27.22M cumulatively. Cash, assets, or minority stakes can be used.
3. Valuation Discounting (FLPs/LLCs): Place assets (such as real estate or closely held businesses) in a Family Limited Partnership or LLC. Minority/marketability discounts of 20–35% are often approved by IRS, reducing reportable value for estate tax purposes. For a $15M property portfolio, this can save $1M–$2M in taxes.
4. Irrevocable Life Insurance Trusts (ILITs): Structure life insurance within an irrevocable trust to ensure death benefits do not inflate taxable estate value. $10M–$20M policies routinely create tax-free liquidity for heirs.
5. GRATs and Qualified Personal Residence Trusts (QPRTs): Move appreciating assets out of your estate over time, locking in current (lower) value for estate tax calculation. Popular among Silicon Valley founders and real estate moguls.

For a comprehensive view of legacy options and deep IRS strategies, see our California Guide to Estate & Legacy Tax Planning.

Red Flag: Why Most High-Earners Overpay Estate Tax

Red Flag Alert: The most common error? Relying on a “simple will” to handle large multi-generation wealth. Wills offer zero protection from federal estate tax and expose heirs to time-consuming probate, which in California adds 1–4% in court costs and delays direct asset transfer.

Another risk: Outdated trust documents not aligned to current tax law—especially with the sunset of the increased exemption due in 2026. Less than 40% of high-net-worth families have updated planning for this looming change.

KDA Case Study: Multi-Generation Family Office in Newport Coast

Persona: High-Net-Worth Individual (Primary Residence + Investment Properties, $48M net worth)
Problem: The patriarch believed a revocable trust preserved his entire estate and planned to leave real estate holdings and a $12M life insurance policy to adult children with no outstanding mortgage.
KDA Solution: Our estate planning team audited all family holdings and identified:

• ~$21M of investments scheduled to be included in the estate (above the $13.61M exemption)
• No federal portability election for spouse who passed 2 years prior
• Insurance policy owned personally (subject to estate tax)

We executed:

• Portability recovery via late Form 706 (as IRS allows for up to 5 years if “reasonable cause” is shown)
• Shifted $12M policy into ILIT, removing from taxable estate
• Transferred minority interest in property portfolio into an FLP for discounting of $4.8M in reportable value

Result: Immediate family savings of $5.4M and preserved over $20M in assets for heirs—an ROI of over 7X net of our $75,000 fee (including ongoing family office services).

Rebuttal: Common Questions & Misconceptions About Estate Tax Rate in California

Isn’t There a California-Specific Estate Tax? Did It Expire?

Correct—California’s state-level estate tax was repealed in 1982. Since then, only the federal rate applies. However, bills to reintroduce a California estate tax are proposed almost annually. If enacted, it could add 10–16% on top of your federal rate. Watch for news from the legislature.

How About Inheritance or Gift Tax?

California also has no inheritance tax. Federal gift tax applies for gifts above $18,000/year/person (2025), but gifts within annual exclusion and up to lifetime exemption are not taxed. See IRS gift tax page.

When Will the Estate Tax Exemption Drop?

Unless Congress takes action, the federal exemption drops to ~$6.8M (inflation-adjusted) per person in 2026—putting thousands more California families into taxable territory virtually overnight.

Will Upcoming Laws Raise the Estate Tax in California?

California legislature has recently reviewed proposals to implement a standalone state estate tax (particularly targeting estates above $3.5M). While none have passed so far, the extremely high cost of living and increased state budgetary needs make eventual passage likely. A proactive estate plan is your only defense.

FAQ

What forms should high-net-worth individuals use for estate tax planning?

• Form 706 (federal estate tax return)
• IRS Form 709 (gift tax return; see here)
• IRS Publication 559 (survivors, executors & administrators)

What’s the #1 thing to review if I’m charitable?

Charitable remainder trusts and direct giving can remove large assets from your estate and lower or eliminate estate tax. These trusts require precise documentation to avoid IRS scrutiny. Always employ a professional advisor from the outset.

Actionable Steps for Wealth Protection Based on 2025 Rules

• Update trust documents and review with a strategist before December 31, 2025 to lock in current exemption rates.
• Initiate portability Form 706 filing for spouses who have died in past 5 years (retroactive filing is possible).
• Engage a professional to implement LLCs, FLPs, or discounting valuations before asset transfers or generational gifting.
• Consider irrevocable life insurance trusts (ILITs) to remove death benefits from taxable estate.
• Track legislative proposals—if California introduces its own estate tax, act immediately to update your plan.

Mic-Drop Tax Strategy Takeaway

The IRS and California aren’t hiding estate tax savings—most wealthy families simply don’t file the key forms at the right time.

Top 3 Social Sharing Snippets

• “Filing the right IRS form can mean a $6M+ difference for California families inheriting wealth in 2025.”
• “California doesn’t tax your estate—unless lawmakers change the law overnight. Are you protected?”
• “Most high-net-worth families lose more to poor estate planning than to the IRS. Avoid the $10M mistake.”

Book Your Estate Tax Strategy Session

If you have $10 million or more in assets, waiting to assess your estate tax exposure is a luxury you can’t afford. Our bespoke advisory process is tailored for high-net-worth families with significant California holdings. We’ll audit your portfolio, help file the right IRS forms, and build dynastic structures to legally shelter $1M, $5M, or even $20M+ from federal and potential state estate taxes. Book your confidential strategy session now and protect your legacy for the next generation—before sunset clauses or new state laws hit.