Why Most Wealthy Californians Get Estate Tax Planning Wrong—and Pay Too Much

Estate tax planning California is one of the least understood, most costly mistakes high-net-worth families make. Recent statistics show that over $13 billion in inherited wealth left California last year due to improper legacy planning and tax inefficiency. For those living in California with estates worth several million dollars or more, waiting until a health event or market shock to start proactive planning is a recipe for disaster. Yet the right strategy can not only preserve generational wealth but can also slash federal estate tax exposure by seven figures—even in a state without its own estate tax. Let’s break down why timing, structure, and proactive guidance make all the difference.

Quick Answer: How Estate Tax Hits Californians in 2025

For 2025, California itself does not impose a state-level estate tax. However, the federal estate tax exemption is set to decrease sharply to approximately $6.4 million per individual (from $13.61 million in 2024) unless Congress intervenes. Estates exceeding that amount face a top federal estate tax rate of 40% (see IRS Estate Tax guidance). Poor planning could easily expose $1M+ in excess tax liability on even an average Bay Area property portfolio or successful small business.

Effective estate tax planning California requires anticipating the sharp drop in the federal exemption. With the 2026 sunset, a Bay Area couple with $15M in combined wealth could see over $2M immediately exposed to the 40% estate tax rate. Strategic use of lifetime gifts, SLATs, and GRATs before the cut preserves today’s higher exemptions and locks in permanent tax savings under IRS Notice 2019-17.

Common Traps in California Estate Tax Planning—and How to Fix Them

Despite headlines about federal exemptions, the real risk for high-net-worth Californians is the ever-changing federal threshold and rapid appreciation in real estate or business values. Here’s what most get wrong:

• Waiting too long: Most families wait until a liquidity event (sale, death, inheritance) to start planning. By then, options are limited—or gone. Act early, ideally while both spouses are alive.
• Failing to fund irrevocable trusts before exemption reductions: With the exemption cut scheduled for January 1, 2026, every year’s delay in using trusts could forfeit millions in exemptions.
• Ignoring gift tax opportunities: The annual exclusion allows gifts up to $18,000 per recipient in 2025 (IRS Gift Tax FAQ), but unused exclusions vanish each year. Strategic gifting leverages both annual and lifetime exclusions to reduce future estate tax.

What’s overlooked is the power of combining strategies—such as Spousal Lifetime Access Trusts (SLATs), Grantor Retained Annuity Trusts (GRATs), and Qualified Personal Residence Trusts (QPRTs)—to multiply exemption leverage. For a $20 million estate, using SLATs and pre-2026 lifetime gifting can shelter over $7 million from estate tax, saving more than $2.8 million in future taxes.

Harnessing Gifting, Trusts, and Entity Structures

As federal law stands, the 2025 federal exemption drop means a wealthy California couple’s combined shelter falls from $27.22 million to about $12.8 million in just months. Here’s what the most savvy families do right now:

• Front-loading gifts while exemption is high: Transferring appreciating assets (such as pre-IPO shares or prime real estate) now puts future growth outside the taxable estate. Example: Transferring $7 million in Silicon Valley private company stock in 2025 versus after 2026 could save $2.8 million in federal estate tax.
• Leveraging irrevocable trusts: Vehicles like SLATs, GRATs, and dynasty trusts allow careful control while removing assets from the estate. Clients who use these trusts before year-end maximize legacy and minimize IRS bite.
• Entity discounts for business owners: For closely held businesses or real estate portfolios, creating Family Limited Partnerships (FLPs) or Limited Liability Companies (LLCs) and gifting minority interests can generate valuation discounts of 10–35%. On a $10 million business, a 20% discount alone can wipe $800,000 from the taxable estate.

For a complete playbook on these and more, see our comprehensive California estate and legacy planning guide.

Unlocking Pro Tax Strategies with Professional Advisory

High-net-worth clients who work with experienced strategists can consolidate estate, gift, and generation-skipping transfer (GST) planning. This means not just reducing estate estimates, but also integrating income tax, real estate, and philanthropy objectives, leading to multi-million-dollar savings for generational legacy funds. For those with unique asset classes (venture investments, restricted stock, art, collectibles), additional planning with grantor and charitable lead trusts can yield tax savings, philanthropic impact, and privacy advantages uniquely suited to California’s tax and legal climate.

If your wealth strategy has not included a multi-disciplinary review in the past two tax years, it’s time to engage premium estate tax planning services before federal rules sunset. Coordination among advisors, CPAs, and legal counsel is essential for advanced strategies—DIY action alone rarely maximizes outcomes.

KDA Case Study: HNW Couple Slashes Estate Tax Exposure Before Exemption Drop

Client: San Francisco technology founder (age 54) and partner (age 49), combined net worth: $28M (mix of firm equity, real estate, and passive business interests).

Problem: Their last review was before 2017’s exemption expansion. With the looming 2026 drop, $15.2M of their estate would soon become exposed to 40% estate tax, creating an estimated $6M liability.

Strategy: KDA structured and funded two SLATs and a dynasty trust with $16.5M in business interests, diversified equity, and real estate. We coordinated business appraisals and legal to apply a 22% entity discount to LLC-held assets. Education-focused charitable lead trust set up for legacy philanthropy. All actions legally built upon IRS guidance (IRS Publication 559).

Result: Projected estate tax reduction: $6.05M. Immediate first-year cost: $38,500 in professional fees. ROI in just one generation: 157x fee. Family preserved real estate wealth, secured future income for children, and created long-term education fund for community.

Red Flags: Mistakes That Cost Californians Millions in Estate Tax

Despite living in a state without its own estate tax, high-net-worth Californians often fall into avoidable traps:

• Assuming their wealth will pass untaxed because “California has no estate tax”—but federal rules still apply.
• Missing the 2025–2026 federal exemption drop window, forever losing multi-million-dollar lifetime gifting opportunities.
• Attempting to amass all assets in joint revocable trusts, which miss higher-leverage strategies with irrevocable/SLAT/dynasty trusts.
• Overlooking entity discounts on businesses and real estate, missing out on 20–25% tax value reductions on transferred wealth.
• Not coordinating gifting, trust, business, and philanthropic planning across all advisors and years.

This set of mistakes cumulatively costs California heirs more than $900 million per year in unnecessary federal estate taxes. The solution is integrating legal, CPA, and business strategy early—ideally, before portfolio values spike or when planning major exits.

Pro Tip: If your total estate exceeds $6M, assume you will be over the federal threshold in 2026—act now to preserve current exemption.

What If My Wealth Is in Real Estate, Private Business, or Non-Liquid Assets?

For wealthy Californians, most assets are not liquid—think of $12M in SoCal commercial property or $5M in private business interests. Specialized trusts (QPRTs, GRATs, FLPs) allow these assets to be transferred, discounted, or leveraged for maximum tax savings. Appraisals and IRS-compliant strategies are key. For real estate, cost seg studies or step-up-at-death rules further enhance after-tax yields (see advanced estate tax reduction options tailored for property owners).

FAQ: Critical Estate Tax Planning Questions for Californians

Will a revocable trust alone avoid all federal estate taxes?

No. Revocable trusts help with probate, privacy, and continuity—not federal estate tax. Irrevocable planning is necessary for substantial savings.

Is the 2025 exemption drop permanent?

Under current law, yes—it will revert to pre-2017 levels in 2026 unless extended or changed by Congress. Proactive planning is essential.

Can I preserve today’s exemption by gifting now—and avoid “clawback” later?

Yes, according to recent IRS guidance (Notice 2019-17), gifts up to the higher exemption amount made before sunset will not be clawed back.

Key Steps for 2025 Estate Tax Planning

1. Get a full asset review, with accredited appraisals for non-cash holdings.
2. Run multi-year projections to model both current and post-2025 exemption scenarios.
3. Work with a multidisciplinary team: tax attorney, CPA strategist, financial advisor.
4. Structure and fund irrevocable trusts ahead of sunset.
5. Capture entity discounts through FLPs or LLC transfers for business and real estate wealth.
6. Document all strategies fully for IRS compliance (IRS Publication 559)..

Book Your California Estate Tax Planning Strategy Session

If your estate is valued above $6 million—or you expect to inherit or sell significant assets in the next year—the time to protect your legacy is now. Don’t leave generational wealth to chance or last-minute tax maneuvers. Book a bespoke estate tax review and discover practical moves to legally minimize your estate tax exposure, while maximizing impact for your heirs and community. Click here to book your confidential strategy session with our team now.