The Hidden Costs and Tax Traps: California Estate Tax Demystified for High-Net-Worth Families

California estate tax is surrounded by conflicting information, leading many affluent California families to make strategic (and sometimes disastrous) mistakes with seven- and eight-figure consequences. If you’ve built significant assets—think $10 million, $25 million, or $100 million+ net worth—ignoring these traps risks more than IRS penalties: it can shatter a legacy. Today’s guide goes beyond the basic “California has no estate tax” myth to expose hidden costs, IRS scrutiny, and misunderstood legal thresholds every high-net-worth Californian must know in 2025.

Bottom Line: What Is the California Estate Tax in 2025?

For 2025, California does not impose a state estate tax, but federal estate tax kicks in for estates valued over $13,610,000 per individual ($27,220,000 per married couple). Regardless, federal rules are changing—and California periodically debates its own estate tax. High-net-worth individuals must design airtight strategies or risk losing millions to the IRS and, potentially, new California legislation. Get California-specific estate tax strategies here.

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

The Real Tax Bill: How Federal Estate Tax Still Hits Californians

California’s lack of a state estate tax is cold comfort when a $40 million estate can still face over $10,000,000 in federal estate tax. The IRS imposes a 40% top tax rate on net estate value above the exemption. For example, with a $50 million estate in 2025:

• First $13.61 million: tax-free (federal exemption)
• Next $36.39 million: taxed at up to 40% = $14.56 million

Result: Heirs receive $35.44 million. The IRS claims the rest.

Pro Tip: Don’t let “California has no estate tax” create a false sense of security. The federal estate tax is the main risk for high-net-worth California families.

Estate Planning Traps: Hidden Compliance Costs and IRS Red Flags

Most affluent families fall for two dangerous traps:

• Poor trust design: Flawed irrevocable trusts or improper titling expose assets to federal estate tax or probate fights.
• Failure to update old plans: Law changes in 2025 can turn a tax-smart trust from 2017 into an IRS audit target.

These errors can trigger IRS inquiries, state-level attorney challenges, and inflated legal bills. According to IRS guidelines on estate and gift taxes, incorrect filings or missed reporting often result in a minimum 20% penalty on top of owed tax (see IRS Topic No. 559).

What’s the Solution? Annual plan reviews with a strategist who stays ahead of both federal tax law and new California estate tax proposals. Explore our white-glove estate planning services for California HNW individuals.

Optimized Wealth Transfers: Outdated Tactics vs. 2025 Compliant Strategies

Many wealthy Californians rely on outdated “crash course” advice from national publications or family offices outside California. Here’s the 2025 reality:

• Annual Exclusion is $18,000/gift per recipient.
• Lifetime Exemption is $13.61M (combined to $27.22M for married couples).
• Grantor trust rules and valuation discounts face increased IRS scrutiny; aggressive valuation tricks invite audits.

For example, a Bay Area founder (age 63, $85M net worth) tried to transfer $12M in company shares via family LLC valuation strategies in 2024. The IRS assigned its own, much higher valuation, triggering a $1.6M dispute.

IRS cites new rules and forms in Form 706.

Today, advanced strategies like Spousal Lifetime Access Trusts (SLATs), Grantor Retained Annuity Trusts (GRATs), and dynastic trusts require careful California-specific tailoring for both federal compliance and golden state quirks.

Why HNW Families Lose Millions: 3 Common California Estate Tax Mistakes

1. Ignoring Potential California Estate Tax Revival: In 2022 and again in 2024, lawmakers proposed a California-specific estate tax to fund state health/education (see SB 378, AB 2088). That didn’t pass—but could any year. Some families structured only for “no state estate tax,” risking total failure if laws shift retroactively.

2. Delaying Lifetime Gifting: The estate tax exemption is set to sunset after 2025, potentially dropping from $13.61M to $5M (inflation adjusted). Gaspar, a Los Angeles real estate investor, waited to gift a $7M apartment building. If exemption drops, he’ll owe an extra $1M tax on death.

3. Over-Reliance on Out-of-State Trusts: Trusts established in Nevada or Delaware might seem bulletproof—but California law aggressively asserts tax authority on “California-connected” assets, and Franchise Tax Board litigation costs can hit six figures.

Red Flag Alert: Relying on boilerplate, out-of-state trust strategies can trigger Franchise Tax Board reviews and jeopardize intended tax treatment.

KDA Case Study: HNW Family Rebuilds Legacy with Proactive CA Estate Tax Planning

Background: The Kingston family, worth $64M, had an outdated trust drafted in 2011, designed around “no CA estate tax.” By 2024, their holdings had changed: $10M in SoCal real estate, $30M in a family business, and the rest in securities. The trust failed to factor new beneficiaries, federal law changes, and ignored AB 2088’s legislative risk.

Challenge: Their former advisor insisted “California doesn’t tax estates” and recommended only federal compliance. When the 2025 sunset threat emerged, the Kingstons faced a projected $8M risk if California revived its state estate tax and federal exemption dropped after 2025.

KDA’s Approach: We performed a forensic trust review, identified missing trust language on California tax allocation, and implemented a multi-layered strategy:

• Rewrote trust to adapt for both federal and possible state triggers
• Advanced SLATs to leverage current lifetime exemption
• Pre-mortem tax forecast with “what if” legislative scenario modeling

Outcome: The Kingstons preserved $7.2M (first-year tax risk averted), paid $44,000 in advisory fees, and locked in a 16.3X ROI. Most importantly, they secured a flexible estate plan that shields against both IRS and potential California retroactive taxes.

How to Future-Proof Your California Estate Plan: Updated 2025 Steps

To avoid seven- and eight-figure losses, every high-net-worth Californian should:

• Review estate plans every 18 months, not just on major family/life events.
• Test all strategies against potential CA estate tax and federal exemption drop scenarios.
• Use California-specific trust provisions that hold up whether state tax is imposed or not.
• Document asset locations, sources, and beneficiaries with precision—FBT and IRS care about these details.
• Engage professionals who audit for both federal and golden state nuances, not just “check-the-box” compliance.

Explore our California-focused estate tax planning services for a personalized audit and future-proof strategy.

Frequently Asked Questions About California Estate Tax

Will California add an estate tax in 2025?

No, as of August 8, 2025, California does not impose a state estate tax. However, state lawmakers regularly propose new bills, and the risk is real. Proactive planning is required.

How does the California estate tax differ from the federal estate tax?

Currently, only the federal government imposes an estate tax—at 40% above $13.61M (2025 figure, see IRS Publication 559). California may reintroduce a state-level estate tax in the future, which would stack on top of federal tax.

What documents should I update to avoid estate tax surprises?

All trust language should be reviewed to address possible changes at both federal and state level. Wills, power of attorney, and beneficiary designations must also be in sync. Annual checkups are no longer optional for families over $10M net worth.

Are out-of-state trusts enough to avoid California tax?

Rarely. California aggressively asserts authority on worldwide assets with a state connection. Using an out-of-state trust alone is not a foolproof shield—and may backfire.

3 Social Media Snippets (Ready to Share!)

• The real threat to California legacies isn’t estate tax law—it’s ignoring IRS changes and FTB risk.
• Out-of-state trusts don’t protect California millionaires from IRS or Franchise Tax Board red flags. Get the facts.
• The $7M deduction your trust probably doesn’t claim: How a future-proofed estate plan preserves generational wealth.

Pro Tip

Start every estate plan review by running “what if” models for California estate tax scenarios—even if laws haven’t changed yet. That’s how you outsmart both the IRS and the Franchise Tax Board.

Book Your Family Wealth Strategy Session

If your estate plan only covers federal taxes or hasn’t been reviewed in the last 18 months, you’re putting seven-figure legacies at risk. Our high-net-worth team at KDA will personally audit your plan, simulate upcoming law changes, and recommend strategies used by California’s most elite families. Click here to book your confidential strategy appointment now.