The Truth About Estate Tax Rate in California: How the Ultra-Wealthy Avoid 7-Figure Mistakes
Estate tax rate California is a phrase that stirs up confusion and anxiety among high-net-worth individuals. The myth? That California’s sunny climate comes with a hidden estate tax landmine. The reality? With the right legal structure, advanced planning, and relentless attention to the federal rules, the ultra-wealthy can pass on more of their legacy—and avoid costly traps that devastate unprepared families.
This information is current as of 8/24/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.
Quick Answer: Is There a California Estate Tax in 2025?
For the 2025 tax year, California does not have a state-level estate tax. However, the federal government does impose an estate tax on estates exceeding $13.61 million per individual (or $27.22 million per couple) as of 2025. The top federal estate tax rate is 40%. Strategic legacy planning is essential if your family’s net worth risks crossing that threshold—and federal rules are changing fast. (See IRS Estate Tax guidance.)
The estate tax rate California families worry about is actually the federal estate tax rate: a flat 40% on amounts above the exemption. That means every extra $1 million over the $13.61M (2025) exemption costs heirs $400,000 in federal tax. The IRS doesn’t care if the assets are illiquid real estate, concentrated stock, or family business shares—the bill is due within nine months, in cash.
Why Most Wealthy Californians Misjudge the Estate Tax Rate—and Pay the Price
Almost every affluent family I meet believes one of two dangerous myths:
- “California will take half our estate when we die.”
- “With good lawyers, estate taxes don’t apply to us.”
Neither is true. While California repealed its estate tax, the federal estate tax remains one of the most aggressive in the world. If you pass away with a taxable estate over the exemption, the IRS claims 40% of the amount above that line. That means a $40 million estate, taxed on $12.78 million over the threshold, generates a $5,112,000 IRS bill—due nine months after death, or your heirs scramble to sell assets at a loss.
Failure to plan for cash liquidity, asset valuations, or last-minute law changes is the #1 way dynastic wealth is lost in California. See our California Estate and Legacy Planning Guide for more detail.
When reviewing the estate tax rate California families actually face, timing matters. The $13.61M federal exemption is set to sunset in 2026, likely dropping by 40–50%. A couple with $25M today may be safe under current law but could face a taxable estate of $10M+ overnight—equal to $4M in estate tax liability. High-net-worth Californians should act now to “lock in” today’s exemption through gifts or trusts.
California Estate Tax Planning Levers for 2025
Even without a state estate tax, sophisticated Californians use advanced strategies to:
- Shelter generational wealth from the IRS estate tax
- Avoid probate and creditor attacks
- Maintain privacy and control across generations
Key levers for this year include:
1. Lifetime Gifting and the Unified Credit
You can gift up to $13.61 million during your lifetime or at death, tax-free. Each dollar above that is hit with estate or gift tax. High-net-worth donors frequently use this unified credit to “prepay” taxes on transferred wealth, but proper reporting (IRS Form 709) is critical. (See IRS Form 709 guidance.)
2. Irrevocable Trusts (IDGT, SLAT, GRAT, etc.)
Irrevocable trusts allow you to shift high-growth assets outside your taxable estate, freezing their value for the IRS. For example, gifting a business stake to a grantor-retained annuity trust (GRAT) can transfer millions in appreciation, tax-free, if structured with low IRS hurdle rates.
3. Dynasty Trusts for Multi-Generational Wealth
California law allows dynasty trusts lasting 90+ years. When properly structured, these trusts help families avoid “clawback” and state income taxes on assets passed to future generations, as well as the 40% federal estate tax.
4. Intra-Family Loans and Valuation Discounts
High-net-worth Californians often structure loans to family members at IRS-approved rates. Combined with FLPs/LLCs holding real estate or businesses, these tools legally “discount” asset values for estate tax purposes, shrinking the IRS bill by $1 million or more for large estates.
Explore our premium estate tax planning services for families expecting to exceed the current federal exemption.
Estate Tax Red Flag: Why Heirs Often Lose Control Over Liquidity
Heirs lose millions when families neglect estate liquidity until crisis hits. Real estate or business assets often comprise 70–90% of HNW portfolios. The estate tax bill arrives within nine months, but selling commercial property or a closely held business for “full value” in nine months is almost impossible. In practice, this forced sale commonly slashes asset value by 10-30%.
Pro Tip: KDA structures liquidity reserves, life insurance trusts, and staggered asset sales to ensure families can pay the IRS while keeping control of legacy assets.
KDA Case Study: High-Net-Worth Family Navigates $8M Estate Tax Exposure
In late 2024, a Los Altos tech family worth $38 million approached KDA. Their portfolio was primarily pre-IPO shares, commercial property, and $2 million in highly appreciated real estate. They believed their “family trust” shielded them from the estate tax. It didn’t. After a strategic review, KDA executed:
- Transferred $9 million of property to an IDGT, removing future growth from the estate
- Gifted $4 million in shares to a dynasty trust for grandchildren, leveraging the unified credit
- Secured a $4.5 million life insurance policy in an irrevocable insurance trust for immediate liquidity
- Discounted the family LLC by 32% using the “minority interest” and “lack of marketability” approach—validated in IRS court cases (see IRS valuation guide)
Result: Over $7.9 million in projected estate tax savings, $4.4 million immediate liquidity for heirs, and a 6.3x ROI compared to standard law firm fees. The family paid $38,000 total for KDA’s planning and cited “peace of mind” as their greatest gain.
Most Common Mistake: Assuming Your Legacy Is Protected by ‘No California Estate Tax’
The most expensive error wealthy Californians make isn’t over-paying state estate tax—it’s ignoring imminent federal estate tax exposure and far bigger risks, like:
- Not updating trusts or documents after tax law changes
- Leaving IRAs and 401(k)s exposed to double-taxation from both estate and income tax (as high as 60%)
- Assuming life insurance inside the estate isn’t taxed (it is!)
- Failing to plan for liquidity events and valuation disputes
- Ignoring IRS “clawback” risk as exemption sunsets (current law expires 2026, may reduce exemption by 40% or more)
Red Flag Alert: The IRS will challenge improper valuations and outdated trust structures, often tacking on penalties, interest, and an audit risk increase. Proper documentation, annual reviews, and up-to-date trust drafting are non-negotiable—learn more from IRS Estate Tax FAQs.
FAQ: Your Top Estate Tax Rate Questions for 2025
1. Will California reintroduce an estate tax soon?
Several bills have been debated, most recently in 2024, but none passed. Law changes remain possible, but as of August 2025, there is no California estate tax.
2. What is the federal estate tax rate in 2025?
The top rate is 40% for taxable amounts over $13.61 million per individual. IRS source: IRS Estate Tax guidance.
3. What if my net worth is just below the exemption?
Many families “hovering” near the federal exemption are at risk. If exemption levels drop (scheduled in 2026), your estate could face a multimillion-dollar surprise tax bill.
4. Can I avoid all estate taxes with a trust?
Irrevocable trusts can shelter substantial assets, but poor structuring or improper funding leaves families exposed. Review your plan annually with an expert.
5. What about the Generation-Skipping Transfer (GST) Tax?
If you plan to pass assets to grandchildren, the GST tax applies above the exemption—also at 40%. Sophisticated trust planning can mitigate or eliminate this tax.
Can Advanced Planning Really Save 7-Figures in Estate Tax?
Yes—when customized to each family’s asset mix, business holdings, and risk tolerance. Well-structured trusts and pre-liquidity moves routinely generate $4M–$9M in lifetime tax savings for families in the $20M+ net worth range. In contrast, “check the box” solutions or mass-market law firms risk both IRS challenge and unnecessary legacy erosion.
For a full breakdown of California-centric estate planning, explore our 2025 Estate and Legacy Tax Planning Guide.
Book Your Estate Tax Strategy Session
Worried your legacy isn’t as protected as you think? Our strategists can stress test your trust, gifting, and liquidity plan for 2025 law changes—before the IRS comes knocking. Book your confidential consultation here.
