California’s Estate Tax Rate: The High-Net-Worth Playbook for 2025 Preservation
California’s estate tax rate is the subject of more urban legends than almost anything else in state taxation. High-net-worth families worry they’ll pay a punitive estate tax when in reality, most Californians face an entirely different tax landscape than they assume. Let’s replace confusion with the wealth playbook: here’s what actually matters for HNW individuals, how the system works in 2025, and—most importantly—what smart families are doing now to sidestep seven-figure mistakes.
Fast Tax Fact: Does California Really Have an Estate Tax?
Direct answer: For the 2025 tax year, California does not impose a state estate tax. Every dollar of estate tax a California resident might face comes from the federal government, not Sacramento. (If another advisor tells you otherwise, ask to see the code.) High estate values are subject only to federal estate tax rates, not a separate California rate.
While California imposes no separate estate tax, the estate tax rate California families actually face is the federal schedule. The IRS applies a progressive structure, topping out at 40% once you exceed the exemption. That means a $1 above the federal limit is subject to the same 40% bite, regardless of whether you live in Los Angeles or Dallas. The myth of a state layer is what misleads many legacy plans.
The Federal Estate Tax and How It Hits Californians in 2025
Here’s where most affluent families get into trouble: The federal estate tax is what truly matters, and it is location-agnostic—your California address does not change this. For 2025, the lifetime estate tax exemption is $12.92 million per person (or $25.84 million per couple), per IRS guidance. After that, the tax rate hits a whopping 40% on additional assets.
Example: If your estate is valued at $30 million (after deductions), you’d face federal estate tax on $4.16 million if married, or $17.08 million if single.
- Amount taxed (married): $30M − $25.84M (exempt) = $4.16M
- Estate tax owed: 40% of $4.16M = $1,664,000 to the IRS
If you are single with a $30M estate, the exposed amount is much higher.
Pro Tip: You can lock in today’s higher exemptions by using advanced gifting strategies—before potential legislative reductions scheduled for 2026.
Strategy Section: Why Outdated Myths About California’s Estate Tax Rate Still Get Rich Families in Hot Water
Let’s address the core misconception: The era of a California-specific estate tax ended in 1982, when the state repealed its “pick-up” estate tax (which piggy-backed on the former federal system). Now, all the threats come from Washington, not Sacramento. Yet, high-net-worth families still make costly errors, such as:
- Delaying trusts or gifting strategies, believing “I’ll handle it once I know there’s a state tax.”
- Assuming their estate plan is safe under the exemption—ignoring the coming federal reduction.
- Neglecting to calculate the effect of real estate appreciation on their taxable estate.
Red Flag Alert: Waiting to act exposes your estate to millions more in federal tax. For a couple with $20M in assets now, if the exemption drops to ~$7M per person in 2026 as projected, $6M+ could become newly taxable—creating a $2.4M surprise tax bill overnight.
Inside a California Estate Plan: Leveraging Trusts and Gifting Strategies for 2025
Federal law penalizes tax procrastination. That’s especially true in 2025, when the sunset of high exemptions looms for 2026. Here’s what high-net-worth Californians are doing:
- Irrevocable Trusts: Used to “freeze” the value of appreciating assets. For example, by moving a $6M commercial building into an irrevocable trust now, any future appreciation is kept out of your taxable estate. This saves $1M+ in estate tax if the asset grows by $2.5M over the next decade.
- Annual Gift Exclusion: The 2025 annual gift tax exclusion is $18,000 per recipient. Gifting to, say, four children and three grandchildren each year allows $126,000 to exit your estate annually, tax-free.
- Spousal Lifetime Access Trust (SLAT): Allows one spouse to make a large irrevocable gift while providing indirect access for the other spouse. This strategy can “lock in” today’s nearly $13M exemption per person before it shrinks in 2026.
- Family Limited Partnerships (FLPs): Centralize management of family assets and provide valuation discounts, reducing the estate tax hit.
- Charitable Remainder Trusts (CRTs): Provide income during your lifetime and ultimately pass assets to charity, removing them from estate tax exposure while delivering current-year income tax benefits.
What If Upcoming Legislation Reduces the Exemption?
Make your moves now. If you gift while the exemption is high, you “grandfather in” your gift—meaning the IRS will not claw it back if the threshold drops. See IRS Form 709 for gift tax reporting.
Why High-Net-Worth Families Must Audit Asset Valuations Ahead of 2026’s Shift
Another “silent killer” is valuation neglect. The IRS accepts fair market values, not unverified guesses. For example, Bay Area real estate held at “cost” for decades may now be worth $15M instead of the $1M on your spreadsheet. Leaving this unchecked exposes your heirs to a tax surprise and potentially invites an aggressive IRS audit.
Pro Tip: Consider a formal business and real estate valuation before end of this year. This supports your future IRS filings and maximizes step-up-in-basis opportunities for your heirs (IRS Publication 551).
Where California Law Does Bite: Property Tax Traps in Family Transfers
While estate tax is federal, California property tax is a state-level landmine. Passing real estate between generations can trigger full reassessment at current market value—leading to drastic property tax hikes. Key traps include:
- Improperly structured “gifting” of a family home
- Misuse of LLCs or partnerships to “hold” real estate without proper legal planning
- Failure to use parent-child or grandparent-grandchild exclusion applications (Prop 19 rules now apply)
For affluent families, mishandling property transfer can mean a $30,000/year property tax bill increase on a legacy estate.
To navigate these pitfalls, explore our premium advisory services tailored for California multi-generational estates.
What the IRS Doesn’t Tell You: Estate Tax “Safe Harbor” Moves for 2025
Most legacy strategies involve complex legal documents. But the highest ROI often comes from knowing the order and timing of moves:
- Gift lower-basis assets first—they get the least benefit from step-up at death
- Preserve high-basis assets for heirs to maximize tax-free inheritance
- Stack annual exclusion gifts across multiple family members to amplify results
- Use staggered trust funding to “beta test” each strategy before committing all assets
Above all, document every action and valuation in writing. See IRS Form 706 guidance for federal estate returns.
KDA Case Study: High-Net-Worth Family Avoids $3.2M in New Estate Taxes
Persona: A private Orange County couple, net worth $22M, early 70s, five children, two primary homes, significant commercial property, and a $5M market portfolio.
Problem: Their former attorney built the plan around “California estate tax” risk—but ignored the looming reduction in the federal exemption. They believed their plan was bulletproof for another decade.
What KDA Did: Our team performed an in-depth legacy audit, immediately updated their trust and will structure, and executed a $10M irrevocable gift to a Grantor Retained Annuity Trust (GRAT), locking in the 2025 higher exemption. We used annual exclusion gifts ($18K × 10 descendants) for $180,000 per year, and advised strategic funding of a SLAT for the children’s benefit, preserving spousal access. The family also transferred a $4M rental property into an FLP, leveraging minority and lack-of-marketability discounts to lower the estate value. Total combined strategies reduced their future exposed estate by $9M. If the exemption had dropped (as now forecast) this would’ve exposed an extra $7M to tax, creating nearly $2.8M in IRS liability.
Result: After professional fees of $85,000, the family saw a projected first-generation estate tax savings of $3.2M—a 37x return—even before secondary property tax savings and annual gifting.
What If You Don’t Do Anything? Risks and Myths Debunked
Failure to act isn’t just inertia—it’s an expensive choice. Myths to avoid:
- Myth: “Estate tax reform is coming—I’ll wait for Congress.” Reality: The only law already on the books is the expiration of the higher exemption. Counting on gridlock is a poor plan.
- Myth: “I can build my plan all at once later.” Reality: Step-ups in asset value, complex business interests, and multi-generational inheritances require staging over years, not months.
- Myth: “California will bring back an estate tax soon.” Reality: No bills have advanced past committee in 5 years, and the 2025 landscape is unchanged.
This blog is current as of 9/7/2025. Always check the latest IRS and FTB regulations or consult with a tax strategist for updates.
FAQ: Estate Taxes, CA Property Tax, and Federal Changes
What are “portability” and “step up in basis”—and how can I use them?
Portability allows a surviving spouse to use a deceased spouse’s unused exemption by timely filing IRS Form 706. “Step up in basis” means most inherited property’s cost basis is reset to market value at date of death; this wipes out decades of built-in capital gains for your heirs. For more, see IRS Schedule D instructions.
Can I give away my home to my kids and avoid estate tax?
No—outright giving can create gift tax issues and property tax reassessment risk. Structured use of trusts or taking annual exclusions is safer and more efficient.
Are trusts still effective after the exemption falls in 2026?
Yes—trusts still “freeze” asset value and shelter appreciation after current gifts. The earlier you act, the more you preserve. After 2026, the urgency (and total possible savings) will be lower, but strategy will remain critical.
How can I estimate the tax bill for my estate?
Use a specialized calculator or work with a qualified adviser to run multiple “what-if” scenarios for estate tax exposure, property tax impact, and potential federal changes. KDA’s team runs multi-scenario modeling for families with $15M+ in assets.
Will my family pay inheritance tax in California?
California does not levy an inheritance tax. Your estate, not your heirs, bears the federal tax, and California imposes nothing further.
Book Your Legacy Tax Strategy Session
If your estate plan still mentions “California estate tax,” or you’re unsure how the 2026 exemption cliff affects your legacy, don’t wait. Wealth preservation is never automatic—especially at this level. Book your confidential strategy consultation with our family office team now and turn tax law into your legacy’s best friend. Book your session—preserve more for the next generation.
