The Untold Truth About Estate Tax Rate in California: How High-Net-Worth Families Can Save Millions in 2025

Most wealthy Californians believe their estate plan is bulletproof. The reality: a single overlooked rule could cost your heirs seven figures in avoidable taxes. For those with substantial assets or multigenerational ambitions, understanding the estate tax rate in California for 2025 isn’t just smart — it’s essential to preserving family wealth. Every year, untold millions are lost to poor structuring and outdated assumptions.

Quick Answer: Is There an Estate Tax in California in 2025?

California currently does not impose a state-level estate tax. In 2025, the only estate tax applicable to California residents or property owners is the federal estate tax, which features a significantly reduced exemption compared to previous years. High-net-worth individuals should plan now, as the federal exemption is scheduled to revert to approximately $6 million per person (from its prior $13.61 million), directly impacting families with estates above this threshold.

This information is current as of 8/30/2025. Tax laws change frequently. Verify with IRS or FTB if reading later.

How the Federal Estate Tax Rate Works for Californians

Even without a state estate tax, the federal estate tax can claim up to 40% of the value above the federal exemption limit. For California residents, this means that—assuming total estate value exceeds $6 million per individual (or $12 million for a married couple, with proper planning)—the IRS can take a sizeable portion at death. For instance, an Irvine business owner with a $22 million estate could lose $4 million+ to estate taxes if no advanced strategies are implemented.

For most affluent Californians, the game is not about “avoiding” the estate tax, but minimizing exposure through proven, legal strategies:

• Lifetime gifting
• Dynasty trusts
• Irrevocable life insurance trusts (ILITs)
• Grantor Retained Annuity Trusts (GRATs)
• Family Limited Partnerships

For deeper, hands-on advice on tailoring these to your estate, see our California estate and legacy planning guide.

Why the 2025 Exemption Drop Puts High-Net-Worth Californians at Risk

The estate tax rate in California doesn’t hit everyone. But for estates once thought “safe” under the $13 million+ exemption, the scheduled reduction in 2025 puts thousands of California families on the IRS’s radar.

Consider a Newport Beach couple with a $17M estate in real estate, investment accounts, and closely held businesses. Under the 2024 exemption, no federal estate tax would apply. In 2025, up to $5 million could be taxable, meaning roughly $2 million or more in overnight exposure. Failing to compress your estate or “freeze” asset growth ahead of the deadline could wipe out a decade of compounding wealth.

What Counts Toward the Federal Estate Tax?

Common misconception: The federal estate tax only covers “liquid assets.” In reality, the tax includes:

• All real estate, including out-of-state/vacation properties
• Business interests, LLC and S Corp stock
• IRA and retirement accounts (with certain exclusions)
• Stock portfolios, bonds, private equity
• Proceeds from life insurance, held outside of a valid ILIT

This often leads to under-appraisal and “unintentional” exposure. It’s critical to have professional valuation evidence and clear documentation for assets and partnerships, especially if operating across states.

Hidden Pitfalls: Red Flags That Cost Heirs Millions

Avoidable mistakes persist even in large, sophisticated estates. Common red flags that trigger IRS scrutiny or excessive taxes:

• Using outdated exemption limits (pre-2025 rates)
• Failing to retitle property into a living trust or exempted entity
• Mixing personal and business accounts/assets
• Undocumented lifetime gifts to children or charities
• Incorrect or missing IRS Form 706 filings — costing estates tens of thousands in penalties

Red Flag Alert: Many HNW individuals die intestate, leaving “DIY” family plans or poorly coordinated legal documents. The resulting probate and tax overhead can easily top $250,000 for estates over $10 million in California. Our premium estate advisory services can review and restructure documents to avoid these costs.

Smart Planning Moves: Strategies That Work for California Estates

1. Annual Gifting: Use the annual $18,000 per recipient gift exclusion to pass significant value out of your taxable estate. For a family of four, this allows $72,000 per donor per year, yielding multi-million-dollar savings over a decade.

2. Dynasty Trusts: Move legacy assets into irrevocable trusts. Properly structured, these trusts keep appreciation outside your estate and prevent future taxation for generations. (See IRS Gift Tax Guidance.)

3. Irrevocable Life Insurance Trusts (ILITs): Protect $5-25M in life insurance from estate inclusion by owning policies via ILITs. Properly administered, this can save heirs the entire 40% estate tax on insurance proceeds.

4. Family Limited Partnerships: Discounted transfers of business/interests to children allow freezing asset values and minimizing transfer valuation for tax purposes.

5. GRATs: For rapidly appreciating assets (like pre-IPO stock), grantor retained annuity trusts transfer gains to heirs with minimal gift/estate tax liability, especially effective ahead of the exemption drop.

For a deeper dive into advanced strategies, visit our 2025 California Estate & Legacy Planning resource.

KDA Case Study: High-Net-Worth Real Estate Family Avoids $2.8M Federal Estate Tax Hit

Consider “The Lennox Family,” who approached KDA with a highly appreciated portfolio: $13M in Southern California real estate, $4M in business holdings, $3M in investments. Their combined estate value ($20M) would have been exempt in 2024, but at risk in 2025 due to the exemption rollback. KDA implemented a two-pronged approach: a dynasty trust (transferring $8M in real estate to future heirs) and an ILIT for $4M in life insurance. Net result: estimated $2.8M in tax savings for the Lennox heirs, with $40K in planning fees, producing a 70x ROI — and a structure that spans multiple generations. By 2029, expected compounded savings exceed $4M due to built-in asset appreciation outside their estates.

FAQs: The Estate Tax Rate in California — What You’re Still Wondering

Is there ever a California estate or inheritance tax?

No. As of 2025, only the federal estate tax applies to California decedents or their property. Laws could conceivably change with political shifts, so periodic review is vital.

What’s the process for calculating your estate’s exposure?

Your estate tax liability is calculated by totaling all assets (using fair market value at date of death), subtracting allowed deductions, applying the federal exemption, and then applying the top 40% tax rate to the remainder. IRS Form 706 must be filed by estates subject to the tax.

How does the reduction in the exemption impact year-to-year planning?

For high-net-worth families whose wealth is near—or above—the exemption, proactive gifting and entity structuring should be evaluated every year. Do not assume past “safe” thresholds still protect you in 2025 and beyond.

Do international assets or out-of-state properties count?

Generally yes: all worldwide assets count for U.S. citizens and residents, though certain foreign structures may allow deferral if planned properly. (Special rules apply.)

What the IRS Won’t Tell You About California Estate Tax Planning

Bottom line: The IRS isn’t publishing playbooks for how to beat the exemption drop. Slow-to-update CPAs or “one-and-done” legacy plans leave millions in exposure as rules shift. The agency’s audit focus will be increasing on estates above $8M starting in 2025, especially for trusts, partnerships, or complex gifting arrangements.

Pro Tip: Update your estate plan every other year or any time Congress changes exemption rules. Major missed filings (like 706) can result in 25%+ penalties and years of probate headaches for your heirs.

Who Should Update Their California Estate Plan NOW?

If your estate—including San Francisco homes, LA condos, business stock, or Bay Area tech equity—totals $6 million or more for a single individual (or $12 million for couples planning portability), start with:

• Comprehensive valuation assessment (get recent, certified appraisals)
• Review of all trust, will, and beneficiary documents—ensure everything is current and coordinated
• Simulate your “estate tax scenario” for both 2024 and 2025 to accurately estimate liability changes
• Begin annual gifting and entity transfers before year-end
• Meet with a specialized tax and legal advisor by Q3 of 2025

Book Your Advanced Estate Tax Strategy Session

If your current estate plan hasn’t been stress-tested for the 2025 exemption cliff, you’re vulnerable. Book a confidential consult with our advanced estate tax strategists and ensure your legacy stays where it belongs — with your family, not the IRS. Click here to book your strategy session now.