California Estate Tax Rate: What High-Net-Worth Families Aren’t Being Told in 2025

Most high-net-worth Californians believe state estate taxes won’t touch their legacy—yet they’re overlooking the real threats that can still erode generational wealth. In the 2025 tax landscape, the **estate tax rate in California** is as much about federal exposure, stealth state traps, and costly missteps as it is about any single published rate. Misreading these complexities has left families paying millions more than necessary—sometimes overnight, with no do-over.

Bottom Line: Does California Tax Your Estate?

As of 2025, California does not impose its own state-level estate tax. However, the federal estate tax rate tops out at 40% on estates above the federal exemption ($13.61 million per individual in 2025). Still, sophisticated taxpayers face high California income taxes and stealth tax risks that threaten multi-generational plans, and mistakes with trust structure or asset titling can trigger unnecessary federal estate taxes. Source: IRS Estate Tax Guidance.

What Estate Tax “Rate” Actually Means (And Why HNW Californians Still Pay Millions)

“Estate tax rate” is more than a published percentage. While there’s no California estate tax, high-net-worth families are exposed to:

• Federal Estate Tax – 40% for 2025 on estates above $13.61 million per person, $27.22 million for married couples with proper planning (see IRS guidance).
• Income Tax on Trusts & Inheritances – Top CA rate is 13.3% for trust income and certain asset sales inside the estate.
• Gift Tax creep – Lifetime gifts above $13.61M are also taxed at 40% federally, and some states do tax gifts (not CA in 2025).
• Step-Up Basis Risks – Future Congressional action may limit or remove step-up rules, causing heirs to owe enormous capital gains on inherited assets.

While California technically has no estate tax in 2025, the estate tax rate California families face is effectively higher once you include trust income tax. Trusts hit the 13.3% state rate after only $10,963 of income (Form 541). When layered on top of the federal 40% estate tax, estates with income-producing assets often see a blended effective rate closer to 50%—a brutal hit without entity restructuring or income-shifting strategies.

The real danger: Failing to structure your legacy exposes wealth to unnecessary 40%+ taxation, even if you “escape” state estate tax for now.

Case Study: How Asset Structure Slashes Effective Estate Tax (Not Just the Rate)

Real Scenario—Multi-Property Family

The Rivera family, residing in Palo Alto, own $19 million in real estate, $8 million in investment accounts, and a closely held software business worth $6 million. On paper, all under the $27.22M federal exemption—safe, right?

• They assumed basic revocable trusts protected their estate.
• Ignored that their business shares would be valued without standard discounts if no special estate planning techniques used.
• Didn’t address $2.5 million in unrealized gains on a rental property transferred into the trust during their lifetime.

After a sudden passing in late 2024, the IRS challenged values aggressively. The family paid:

• $2.4 million in federal estate tax
• $463,000 in California trust income tax (from post-death asset sales)
• $810,000 in lost deductions due to improper asset placement

Effective “estate tax rate?” Nearly 15%—even with no California estate tax on the books.

KDA Case Study: High-Net-Worth Family Office Planning

Persona: Family office, diversified portfolio ($38M assets), tech business founder

Problem: Assumed California’s lack of estate tax meant no action required. Had single revocable trust, poorly coordinated gifting plan, and C-corp shares titled in individual name.

KDA’s Strategy: Implemented multi-layer strategy using Charitable Lead Trust, QSBS planning to optimize Section 1202 exclusion, discounted family LLC structure, and layered annual exclusion gifts with “Crummey provisions.” Pre-funded Irrevocable Life Insurance Trust (ILIT) for liquidity coverage. Coordinated all with updated buy-sell agreements for business.

Result:

• IRS-accepted estate value reduction by $8.1MM (21% of estate value)
• Low- or zero-tax transfer of $13.8MM to heirs through combination vehicles
• Upfront planning fee: $48K
• First-year real reduction in expected tax: $3.24 million (with future benefit compounding over 10 years)

ROI: 67x on up-front advisory cost in first year alone, by avoiding tax traps “hidden in plain sight.”

Pro Tip: The Estate Tax “Rate” Only Matters If You’re Guessing

Pro Tip: Your effective estate tax is the sum of federal, state, and stealth taxes your assets face—not a single published number. The right strategy easily slashes exposed wealth by 40% or more—if you act early.

Hidden Tax Traps: Why Most California Estates Still Bleed Millions

The $0 State Estate Tax Myth

• Misplaced Trust Assets: Revocable vs. irrevocable trusts have drastically different outcomes. Many high-net-worth families “set it and forget it” with trusts that fail to shield assets at death.
• Improper Family Limited Partnerships: Without proper discounting and IRC §2704(b) protections, the IRS can wipe out valuation discounts on closely held business shares—a common HNW trap.
• California Income Tax on Trusts: Complex and poorly structured trusts with California situs face trust income tax (up to 13.3%) after the first $10,963 of income (Source: California FTB Form 541).
• Lack of Annual Exclusion Gifting: Failing to max out $18,000/person annual gifts leads to compounding unnecessary estate exposure.

Strategies to Lower Your Family’s True Estate Tax Rate in California

• Set Up or Review Discount Entities: Use Family LLC/LP to reduce asset values for transfer. Must comply with IRS rules on discounts and state partnership law.
• Coordinate Asset Titling: Ensure business shares, real estate, and investments are titled to optimize discounts and exemptions. Consider community property rules for married couples in California.
• Make Lifetime Gifts: Leverage the $13.61M lifetime Federal exclusion before it’s likely cut in half in 2026. Use annual exclusion gifts and “529 superfunding” for education.
• Consider Irrevocable Trusts: Protect high-growth or appreciating assets in ILIT or Spousal Lifetime Access Trusts (SLATs).
• Optimize Step-Up Basis: Position volatile assets to maximize step-up under IRC §1014 (current rules in 2025), but beware of possible Congressional changes.

For more deep-dive strategies, review our California Estate & Legacy Tax Planning Guide.

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Common Mistake: Waiting Until 2026 to Address Looming Exemption Crash

Red Flag Alert: Many HNW families are leaning on the “temporary” federal exemption ($13.61M/person in 2025), ignoring looming sunset in 2026 (to ~$7M/person). This misstep could raise your effective estate tax by millions overnight. Early gifting and restructuring in 2025 remains your strongest play.

Quick FAQ: California Estate Tax Planning in 2025

Does California Have an Estate Tax?

Not in 2025—however, families with large trusts or income-generating estates in CA will still face state income tax on trust/inheritance income and must plan for federal estate tax.

What Is the Federal Estate Tax Rate in 2025?

40% on estate value above $13.61M for individuals, $27.22M for married couples with portability election. See IRS guidance.

How Can I Lower My Estate Tax Exposure in California?

Key strategies: discounted entity structuring, lifetime gifting before exemption drop, coordinated irrevocable trusts, and correct asset titling in alignment with state and federal law.

Will the Exemption Really Drop in 2026?

If Congress does not act, the federal exemption will drop to ~$7M/person at the beginning of 2026, exposing far more families.

Myth Bust: Only Billionaires Need Advanced Estate Planning in CA

With home values and tech equity soaring, routine Bay Area families are now facing federal estate tax risk. Don’t wait until Congress acts—proactive planning beats reaction every time.

This information is current as of 8/23/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

Book Your Legacy Strategy Session

If your estate is over $13 million, the “no California estate tax” myth could cost your family millions. Get a personalized, coordinated plan to preserve your legacy, reduce risk, and sleep at night. Book your estate strategy session today—clarity, confidence, and $1M+ in potential savings await.