Estate Tax Rate California: How the Wealthy Legally Shield Millions in 2025
Ultra-wealthy families in California fear one thing above all: an unexpected estate tax bill that erases decades of effort in a single IRS notice. Californians with net worths above $10M, $20M—or even $50M—stand exposed to a shifting legal landscape, often operating under hard-wired myths that cost families millions. If you own businesses, commercial real estate, or substantial investment accounts, read closely: the rules of the estate tax rate California are not what most advisors tell you—and the window for action is closing fast.
Quick Answer: As of tax year 2025, California does not have a state-level estate tax, but federal rules still apply to estates above $13.61M per individual. Large gifts made before death, GST tax traps, and improper trust structuring remain the top hidden dangers for California’s high-net-worth families. Effective planning—often leveraging advanced trusts, business entities, and valuation discounts—can save $7M, $15M, or more per estate, provided action is taken before proposed sunset provisions or legislative changes hit.
Why Most Wealthy Californians Underestimate the Estate Tax Threat
It’s on nearly every attorney’s website: “California has no estate tax.” Many high-net-worth individuals relax, believing they’ve dodged the bullet. That’s a mistake. Here’s why:
- California follows federal estate tax law, currently imposing a 40% federal estate tax rate on amounts above $13.61M per person ($27.22M married couple for 2025).
- High-value estates often miscalculate the impact of the federal estate tax, missing portability elections, grantor trusts, and transfer techniques that can halve the effective tax rate.
- Pending federal law changes could slash the exemption back to $5–7M per person after 2025—catching unprepared families unexpectedly.
For context: If your estate totals $35M and you die in 2025, that last $7.78M (35M – 27.22M) is taxed at 40%, costing your heirs $3.1M. Miss critical GST planning? Add an extra 40% on top.
This information is current as of 8/19/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.
Federal Estate Tax Rates in California: What Actually Applies?
Let’s clarify: There is no California estate tax, but every California resident is subject to the federal estate tax. The rates are:
- Up to $13.61 million per individual—no federal estate tax owed for 2025
- Above $13.61 million per individual—taxed at a flat 40%
- Gift and GST taxes: Share same unified exemption, but may apply to different assets or generations
Example for high-net-worth couple (“married filing jointly”): With $25M in net assets (business equity, homes, investments), you can currently transfer all your wealth tax-free upon first spouse’s death via the unlimited marital deduction, if the surviving spouse elects “portability” correctly on Form 706. If one spouse dies and no election is made, the combined exemption is lost and the family could owe $4.5M+ in unexpected federal estate tax on the same assets at the second death. Reference: About Form 706.
Red Flag Alert: The Common Overlooked Estate Tax Trap for Californians
The single biggest oversight: Large family business or real estate holdings held in joint names without well-crafted irrevocable trusts or business entities. Here’s the result:
- Family LLC assets valued at $18M, with 60% voting held by parents and 40% non-voting by two children.
- No discounted valuation due to poor documentation—IRS assesses at full $18M fair market value.
- Estate incurs >$1.7M in avoidable estate tax. Simple tweak: Appraisal and properly drafted operating agreement could have supported a 30% discount, reducing taxable value by $5.4M and saving $2.2M in taxes up front.
Most families also over-gift in “bad years,” triggering needless gift tax returns when loan or intra-family sale structures could defer taxation altogether.
Pro Tip: Families can leverage advanced strategies like Grantor Retained Annuity Trusts (GRAT), Irrevocable Life Insurance Trusts (ILITs), and minority interest discounts to legally shrink the taxable estate by up to 50% on paper, before the IRS ever sees the numbers.
Why Now? Looming Federal Changes and the Dangers of Waiting
There is a real risk that the $13.61M per-person exemption “sunsets” on 12/31/2025, reverting to pre-2018 levels—likely between $5–$7M per person. Congress debates these numbers annually, and California voters have proposed bills aiming to re-establish a state estate tax in the wake of ballooning state deficits.
If your estate is currently $16M, this exemption shrinkage costs your children $2.4M more in federal estate tax overnight. Waiting until after 2025 is not an option—asset protection structures take months to finalize, and IRS anti-abuse rules will treat last-minute transfers with extra scrutiny (see IRS Notice 2019-60).
This is why the most proactive families are accelerating gifts and trust “freezes” in 2025, especially by using structures that lock in today’s exemption, even if Congress retroactively lowers the limit later.
The Engineered Solution: Multi-Trust Planning for High-Net-Worth Families
Californians at the $20M+ level rarely use just one trust. Sophisticated plans stack strategies, including:
- Dynasty Trusts for generation-skipping protection
- GRATs for low-risk, high-value transfer at discount
- ILITs to pay estate tax with insurance proceeds transferred outside the estate
- Family LLC/FLP discounts (documented with “non-voting” interests, annual appraisals, and signed minutes)
- Charitable lead/remainder trusts to sidestep capital gains while benefiting philanthropy
Example scenario: Owner of Southern California commercial property portfolio, net worth $35M. By moving $17M of low-basis assets into an irrevocable dynasty trust in 2025, he locks in the full exemption for those assets, pays no gift tax (because of valuation discounts and planned sales), and eliminates $4M in potential federal estate tax due to effective planning.
IRS Guidance: What You Must File & When
Every high-net-worth family should be aware of the following IRS filings:
- Form 706 – Estate (and Generation-Skipping Transfer) Tax Return, due nine months after death. See IRS guidance.
- Form 709 – United States Gift (and Generation-Skipping Transfer) Tax Return, due annually if gifts above exclusion are made. See IRS guidance.
- Schedule A-1 – “Section 6166” deferral, allows qualifying business owners to pay estate tax over 15 years (if business = minimum 35% of estate value). See details.
Missing any one of these can destroy years of planning and multiply audit exposure.
Hidden Dangers: Blended Families, Out-of-State Assets, and Foreign Holdings
The IRS scrutinizes three scenarios in California estates:
- Blended families marrying after large children’s inheritances are expected—risk of accidental disinheritance or double estate taxation.
- Out-of-state property (e.g., second homes in Nevada or New York)—subject to probate, and sometimes ancillary state inheritance tax.
- Foreign assets—especially accounts or property abroad: U.S. estate tax applies to global assets for citizens and resident aliens. Reporting requirements for FBAR, FATCA pile on, with $10,000+ penalties for nondisclosure (IRS comparison here).
Addressing these requires both California and federal counsel—missed filings mean additional 40% penalties, not just tax!
Learn More In Our Complete Guide
To go deeper on exemption planning, GST trust structures, and valuation discounting, see our California Guide to Estate & Legacy Tax Planning (2025 Edition). This comprehensive resource includes a section for ultra-high-net-worth estate planning, as well as practical implementation checklists.
Mid-Article Resource: KDA Premium Advisory Services for Estate Tax
If your family needs help executing a $10M+ transfer or building generational trusts, consider our premium estate tax planning services. These are designed specifically for estates facing multimillion-dollar transfer tax liability, as well as families with real estate, business, and complex holdings.
KDA Case Study: $12M Saved in Federal Estate Taxes for a California High-Net-Worth Family
Persona: High-Net-Worth Family (business, real estate, investments), net worth $37.5M, based in Newport Beach, CA.
When the patriarch—an entrepreneur with $16M in business assets, $12M in multifamily properties, and $9.5M in investment portfolios—faced serious health challenges, their existing plan would have exposed $10.28M to 40% federal estate tax, resulting in a $4.1M tax bill. KDA’s team:
- Implemented a series of irrevocable defective grantor trusts for business ownership, fixing poor titling and securing valuation discounts.
- Layered in an ILIT to fund taxes on illiquid assets and avoid forced sale of investment property.
- Accelerated $7M of gifts using annual exclusion and spousal lifetime access trust (SLAT), while avoiding GST and gift tax.
Result: Legacy plan was documented, $12.2M shielded from estate tax, total tax bill dropped to $2.06M. Family paid $35,000 in fees—netting a 5.3x ROI, freeing heirs to inherit properties intact.
Myths and Mistakes: What the IRS Won’t Tell Wealthy Californians
- Myth: You don’t need to file IRS Form 706 if your assets are under the exemption. Incorrect—portability is only preserved if you file on time (see IRS Publication 559).
- Trap: Failing to document the business purpose of family LLC or partnership discounts. The IRS will disallow aggressive discounts and assess tax—and penalties.
- Red Flag: Ignoring GST tax on transfers to grandchildren or irrevocable trusts. GST has its own 40% tax rate and reporting duty on Form 709.
FAQs: California Estate Tax Rate and Planning
Will California add its own estate tax in the future?
Possibly. State-level bills are introduced nearly every legislative session, but none have yet cleared the Assembly. Stay vigilant if your estate exceeds $10M, especially with the sunset of current federal exemptions on the horizon.
Can I move to Nevada or Texas to avoid the estate tax?
Yes, but only the state tax component. The federal estate tax applies to U.S. citizens regardless of residence. It is critical to establish domicile properly—simply buying a home in another state does not always succeed if the IRS challenges your residency after death.
Are annual gifts under $18,000 free from all reporting?
No. While they are exempt from federal gift tax, large cumulative gifts may trigger reporting duties on IRS Form 709, even if no current tax is owed. Documentation remains key.
Does my trust or entity protect me from all taxes?
No. Trusts and LLCs can provide substantial leverage, but must be properly drafted, funded, and maintained—all subject to IRS scrutiny (including the “step transaction” doctrine). Get expert review at least annually or with any major asset change.
What documents will the IRS audit first?
Title records, operating agreements, amendments, signed appraisals, and prior years’ gift/estate tax returns are prime targets. The more organized and valid your supporting docs, the lower your risk of audit penalties.
California-Specific Insights: Real Estate, Business, and Complex Estates
For business owners and real estate investors, the interplay of valuation, income tax, and legacy planning is everything. Capital gains taxes interact with estate freeze techniques, while discounting and charitable trusts let you pass assets at the lowest legal value.
Example: Transferring a $9M apartment complex with zero basis into a charitable remainder trust allows a deduction for the present value of remainder interest, may reduce income taxes, avoids capital gains, and eliminates estate exposure. See IRS Publication 526 for rules.
Book Your High-Net-Worth Estate Tax Strategy Session
If you have $10M+ in assets and want to control your legacy (and your estate tax liability), KDA’s experts can engineer a custom solution to lock in savings before exemption changes hit. Click here to reserve your confidential strategy consultation now.
