The Surprising Truth About Estate Tax Rate in California: What High-Net-Worth Families Must Do Now
Most wealthy Californians believe their estate is safe from state taxes—but tactical inaction could hand six or even seven figures to the IRS. In 2025, more estates will cross the federal threshold and face complex challenges. Doing nothing isn’t smart. Getting proactive? That can protect $5M, $15M, even $50M+ for your heirs—completely legally.
This information is current as of 8/18/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.
The Fast Answer: Do You Owe a California Estate Tax?
California does not currently levy its own estate or inheritance tax. However, high-net-worth families here must contend with the federal estate tax, levied at 40% above $13.61 million (2025) per individual. This exclusion amount is scheduled to drop by half starting January 1, 2026, risking millions in new liability for those unprepared. Anyone holding $14M+—between business, real estate, and investments—should act before year-end. Read our comprehensive California estate planning guide for deeper insights.
While there is no separate state-level estate tax, the estate tax rate California families face is effectively the federal 40% levy on assets above the exemption. In real numbers: a $20M estate in 2025 means $6.39M is exposed, creating a $2.55M IRS liability unless shielded with trusts, gifting, or entity planning. For married couples, the “portability” election is the only way to preserve the doubled exemption.
Why the “No State Tax” Myth Could Cost You Millions
Because California abolished its state estate tax in 1982, many believe they’re clear. But here’s the truth: With the federal exemption reverting to ~$7 million per individual in 2026, high-net-worth estates will face up to 40% tax on amounts above that. One misguided trust structure or improper gifting plan can mean losing $4 million out of a $10 million estate—money that could have built generational wealth. Don’t let “no state tax” lull you into complacency—today’s federal rules hit hardest in expensive states like California, where wealth is often concentrated in real estate.
The phrase estate tax rate California is misleading—while the state imposes no additional layer, federal liability is identical whether you live in Newport Beach or Nevada. The problem is that California wealth is disproportionately tied to real estate, which is illiquid at death. Without liquidity planning, heirs are forced into fire sales to satisfy the IRS bill. That’s why pairing FLPs with ILITs is often essential for California-based estates.
Strategy #1: Gifting Now to Beat the 2026 Sunset
If your estate is near or above $7 million ($14 million married), now is the time to gift major assets. Under the IRS unified credit rules, gifts above the annual exclusion ($18,000 per recipient in 2025) eat into your lifetime limit—but any excess over the exemption by year-end will be grandfathered in, even after rates reset. Example: Transferring $5 million now at a 0% gift tax means sidestepping a future taxable event that could generate $2 million+ in estate tax after 2026.
Pro Tip: Consider using spousal lifetime access trusts (SLATs) or irrevocable grantor trusts to move assets efficiently. See IRS estate and gift tax FAQ for guidelines.
Strategy #2: Foundation and Charitable Planning—Deduct and Avoid Estate Tax
Moving part of your wealth into a private foundation or donor-advised fund offers dual benefits: Reduce your taxable estate and make philanthropic impact. Donating $1M in 2025 can trim your estate’s taxable value while enabling ongoing family control via foundation boards. Calculate the savings: For every $1M given, that’s roughly $400,000 of estate tax avoided, plus ongoing income tax deductions. It’s win-win—if set up right.
Strategy #3: Advanced Entity Structuring for CA Real Estate Owners
Many California HNW families have real estate as their primary asset. Proper use of LLCs and Family Limited Partnerships (FLPs) not only provides operational management and privacy, but—done strategically—can discount minority interests for estate valuation. Courts often accept discount rates of 20-30%. A $10M income-property inheritance, if structured with an FLP, could be appraised for estate tax at $7M. That’s $1.2M in federal tax saved, thanks to advanced entity planning. Explore exclusive premium advisory services for entity structuring and legacy planning.
Strategy #4: Portability and the “Second-Death Trap”
Married couples get double the exemption if handled right—but you must elect “portability” by filing IRS Form 706 within 9 months after first spouse dies. California couples often forget this, leading to seven-figure tax bills after the second death. Don’t rely on outdated family plans. Actively review your documents and election strategy annually, especially with assets appreciating fast. See IRS Form 706 guidance.
Strategy #5: Irrevocable Life Insurance Trusts (ILITs)—The Liquidity Solution
Federal estate tax must be paid in cash within nine months of death. For families with high net worth locked in real estate or private businesses, that can mean forced sales. Using an ILIT—an irrevocable trust that owns a life insurance policy—provides instant, tax-free liquidity for the estate without inflating the taxable base. For example: A $10M estate buys a $4M ILIT-funded policy. Upon death, heirs have cash to pay taxes, and all proceeds pass outside the estate—zero federal tax exposure for the insurance payout itself.
KDA Case Study: $23M Real Estate Family Shields $7.2M from Estate Tax
Persona: High-Net-Worth Individual—Real Estate Family (Orange County, CA)
Profile: Couple in their mid-60s, $17M in CA income property, $6M in equities/private business
Problem: Believed “no CA estate tax” meant no major risk. Never updated plans after acquiring real estate.
What KDA Did: Deployed Family Limited Partnership to transfer undivided interests to children, creating a 28% discount for valuation. Set up SLATs to shift $8M out of taxable estate before the 2026 exemption sunset. Created ILIT for $4M to cover future tax bill.
Tax Savings: $7.2M reduced from federal estate exposure; $1.6M gift tax totally avoided by using current lifetime exemption—returns estimated at 8x their total professional fees.
What They Paid: $35,000 in KDA advisory fees.
ROI: Over $7M protected; future generations benefit while family legacy remains intact.
The Hidden Risk: Why Estates Trigger Audits (and How to Avoid)
The IRS is on the lookout for underreported asset values, especially for CA real estate and closely held business stock. In 2023, IRS targeted more than 14,000 estate tax returns for audit, especially those reporting large valuation discounts or failing to file required schedules for complicated trusts. The most common mistake? Relying on outdated values or missing key documents during the nine-month estate process.
Red Flag Alert: Audits rise when families fail to report lifetime gifts or commingle personal and business assets. Ensure all documentation—appraisals, FLP records, gift tax forms—is handled by a specialist.
Pro Tip: How to Protect Multi-Generational Wealth
Use annual exclusion gifts ($18,000 per recipient in 2025) every year to segment wealth. Build a gifting calendar and leverage trusts for larger moves. The window to use today’s $13.61M exemption will close in less than 17 months.
Frequently Asked Questions About Estate Tax Rate in California (2025)
Does California have an estate tax in 2025?
No, but federal estate tax applies to estates above $13.61M single/$27.22M married in 2025. That threshold will drop by about half in 2026. See official IRS estate and gift guidance.
If my assets are in real estate, do I have to sell properties to pay estate tax?
Not if you plan ahead. Strategies like FLPs and ILITs can help provide cash for tax bills without liquidating hard assets.
What’s the best way to start estate tax planning in California?
Work with specialists who understand federal and CA property law. Start by estimating your combined assets, reviewing your will/trust, and considering annual giving or advanced trusts. Premium advisory services can help map a custom solution.
What If I Hold Large Retirement Accounts?
401(k)s and IRAs are counted as part of your federal taxable estate, even if designated to heirs. Consider Roth conversions or charitable rollover strategies if near the exemption limit.
Can I Avoid All Estate Taxes if I Gift Everything Now?
Large, last-minute gifts still count toward your lifetime exemption—unreported gifting will not escape IRS scrutiny. Get guidance from a pro, as mistakes can result in unexpected taxes or penalties later.
Book Your Estate Tax Clarity Session
Worried that the upcoming federal exemption sunset could cost your heirs millions in extra tax? Take control now and build the right plan. Book a personalized, one-on-one estate tax strategy session with KDA—get direct answers, optimized structures, and confidential advice for California’s most complex wealth cases. Click here to book your consult today.
