California Estate Tax: Advanced Planning Moves for High-Net-Worth Individuals in 2025
Most high-net-worth Californians believe that with no formal state estate tax, they’re in the clear for legacy planning. The truth? Overlooking California estate tax strategies creates silent, six-figure tax risks when you sell or transfer large assets—and may subject your estate to federal taxes that could have been reduced or even eliminated with the right planning.
Every year, more Californians cross the federal estate tax threshold and face unnecessary tax bills on inherited real estate, businesses, and investments. If your estate tops $14 million (and soon $15 million) as scheduled for 2026, you’re a target. But sophisticated planning, timed gifting, and proactive structuring can keep millions in your family’s hands—not the IRS’s.
Quick Answer: There is no traditional California state-level estate or inheritance tax, but poorly managed estates risk triggering both federal estate tax (40% on assets above the exemption) and painful capital gains through flawed legacy transfers. The key: strategic use of trusts, timely lifetime gifting, and preparation for declining exemption thresholds in 2026.
Why California Estate Tax Planning Is More Urgent in 2025
Estate planning has always been about more than “avoiding taxes”—it’s about controlling who benefits from your life’s work. In 2025, the urgency spikes for several reasons:
- The federal estate tax exemption remains at $13.99 million—but drops to about $6-7 million (plus inflation) in 2026.
- California has no current estate tax, but Democrats have attempted to pass one multiple times in the past five years.
- High real estate values in Orange County, Los Angeles, and the Bay Area put even ‘ordinary’ families well above federal thresholds.
- Non-citizen spouses, multi-state holdings, and complex trusts all create extra risk unless addressed proactively.
IRS guidance and California Franchise Tax Board rules both stress documentation. Miss a disclosure, and your estate can face federal audit scrutiny or lose key deductions (see IRS Estate Tax guidance).
How High-Net-Worth Californians Lose Millions Without Planning
The single biggest mistake wealthy Californians make is assuming “no estate tax” means no risk. They then:
- Fail to update their trusts when federal exemption changes
- Transfer appreciated real estate before death, missing the step-up in basis—and triggering avoidable capital gains for heirs
- Ignore gifting strategies while alive, squandering the $19,000 annual tax-free gift exclusion or the $13.99M lifetime exemption
- Neglect spousal portability (carrying over a deceased spouse’s unused estate exemption), risking a $1M+ tax bill
- Hold business equity or out-of-state property in their own name rather than trusts or family LLCs, making those assets subject to probate and out-of-state estate taxes
Let’s illustrate this with numbers. Consider a Silicon Valley executive who passes away in 2025 with a $17 million estate (mostly real estate, stocks, and a business).
- $13.99 million federal exemption shields most of the estate
- $3.01 million exposed to 40% estate tax = $1,204,000 owed
- With good planning (gifting, spousal trusts, discounting), this liability could have been shrunk to $150,000 or less
Advanced Strategies to Shield Your California Estate
Successful high-net-worth estate plans blend multiple tools—trusts, gifting, charitable vehicles, and business structures. Here’s how savvy Californians reduce tax exposure and build generational wealth:
1. Gifting Strategy: Use Both Annual and Lifetime Exemptions
- Gift up to $19,000 per person per year to as many people as you want—completely free of federal or state tax.
- Leverage the lifetime exemption ($13.99M in 2025) by gifting portions of business interests, investment property, or other assets before 2026 cuts limit in half.
- Example: A couple gifts $19,000 to each of their three children and five grandchildren every year ($152,000/year off the estate) and transfer a $5M family business stake by 2025. Total long-term tax savings? Over $2 million, conservatively.
2. Trusts for Asset Protection and Probate Avoidance
- Revocable living trusts keep assets out of California probate, saving significant legal fees and months of delay for heirs.
- Irrevocable gift trusts, Grantor Retained Annuity Trusts (GRATs), and Spousal Lifetime Access Trusts (SLATs) freeze asset values for estate tax and let growth escape future tax.
- Dynasty trusts based in states like Nevada or Delaware provide extra protection for multi-generational legacies—often with zero state-level tax unless improperly structured for California beneficiaries.
For in-depth breakdown of options, read our California estate tax planning guide.
Why Portability and Step-Up in Basis Cannot Be Ignored
Two of the most overlooked and misunderstood planning techniques for high-net-worth individuals in California involve the portability of the estate tax exemption and the use of step-up in basis for inherited assets.
- Portability: If your spouse dies and you don’t timely file IRS Form 706, you can lose the spouse’s unused exemption. That means, starting 2026, your estate might be taxed on amounts above $7 million—rather than $14 million. Potential cost to heirs: Over $2.5 million in unnecessary taxes.
- Step-Up in Basis: When heirs inherit assets at death, the tax basis resets to current value. Sell immediately and pay zero capital gains. But if you transfer real estate or stock before death, heirs receive your old, low basis—paying capital gains of 20%+ on the full spread. For a $5M house bought at $1M, that’s a $800,000+ avoidable tax!
When handled properly, these two tools mean estates can transfer tens of millions to future generations with minimal tax burden—even as lawmakers threaten tax increases.
KDA Case Study: High-Net-Worth Couple Defuses $1.5M Estate Tax Bomb
Meet Robert and Elena, a couple based in Orange County with a $16.8M blended estate (real estate: $8M, investments: $5.5M, business: $3.3M). Before coming to KDA, they assumed “no California estate tax” meant a simple will would suffice. Their previous attorney hadn’t prepared for the coming federal exemption reduction, hadn’t discussed portability, and had not advised on annual gifting tactics.
Our KDA team reviewed their entire portfolio. We helped them:
- Set up a Spousal Lifetime Access Trust (SLAT) to move $6M of business/investment assets out of their estate before the 2026 drop
- Begin maximizing annual $19K per-person gifts (removing $152,000 from the taxable estate per year)
- Refinance real estate inside a trust, maintaining full step-up in basis for heirs and full control for them while alive
- Ensure prompt IRS Form 706 filing for full portability on spouse’s passing
Over five years, Robert and Elena avoided more than $1.5 million in potential federal estate tax while maintaining family control over assets. They invested $9,500 in legal and KDA advisory fees—returning more than $150,000 in savings each year plus tens of hours in prevented audit/mechanical probate headaches. ROI: Over 10x in a single estate transfer.
Ready to see how we can help you? Explore more success stories on our case studies page to discover proven strategies that have saved our clients thousands in taxes.
Pro Tip: Leverage Premium Advisory Services for California Estates
Why do sophisticated families rely on ongoing professional support? Because the interplay of California real estate, federal estate rules, residency audits, and multi-generational trusts creates traps. Our premium estate planning advisory services are built for complex California needs—annual strategy sessions, trust reviews, coordination with legal counsel, and compliance defense if your estate is ever challenged.
Bonus: For charitable planning, donor-advised funds and family foundations can be established now, locking in 2025 deduction values for gifts that are realized over the coming decade.
Common Estate Planning Mistakes Californians Can’t Afford
- Waiting until after 2025 to act—by then, the exemption may be halved and there’s little room for tax-free gifting to children or trusts.
- Relying on only a will without advanced trusts—especially dangerous for multi-million-dollar real estate portfolios that could end up stuck in California probate for over a year.
- Overlooking non-U.S. citizen spouse rules—transfers to a non-citizen spouse are capped for the marital exemption ($175,000 in 2025; rising slightly in 2026, see IRS instructions), and require special trust structuring to avoid taxation.
- Neglecting to update trusts or power of attorney documents as tax laws, family circumstances, or residency change.
Red Flag Alert: Failure to report lifetime gifts over the annual exclusion triggers IRS and California audit scrutiny. Make sure to file Form 709 for all such gifts.
What If the Federal Exemption Drops in 2026?
All signs point to a sharp drop in the federal estate tax exemption in 2026—possibly down to $7M per person. High-net-worth Californians can avoid the worst pain by executing lifetime gifts, recalibrating trusts, or using valuation discounts before the deadline. Don’t wait for lawmakers to make it official—the window for “bonus” planning is closing fast.
FAQ: California Estate Taxes in 2025—and What’s Next?
Does California Have Its Own Estate or Inheritance Tax?
No, not yet. As of 2025, there is no state-level estate or inheritance tax, but future legislative proposals are likely given California’s fiscal trends. Always verify with your planning team each year.
How Do I Know If My Estate Is Vulnerable?
If your total assets—including California real estate, business equity, and out-of-state holdings—exceed $12 million ($24 million for couples), you’re at risk even before the 2026 exemption reduction. Start with an estate valuation and qualified review.
Is There Any Way to Avoid Federal Estate Tax Entirely?
Yes—combining gifting, advanced trusts, charitable vehicles, and timely spousal planning can reduce or eliminate federal estate tax for many high-net-worth families. However, the more you wait, the fewer your options.
How Are Out-of-State Properties Taxed for Californians?
Out-of-state holdings may be subject to probate and estate tax in their respective states. Proper titling (trust or business structure) is crucial to avoid duplication of legal process and potential double taxation.
Three Must-Know Takeaways for High-Net-Worth Estate Owners
- The 2026 federal exemption drop will expose millions in California assets to new estate taxes—prepare now.
- Gifting and trust strategies, when used properly, can save $1-5 million in federal taxes for high-net-worth families.
- The true risk isn’t having no plan, but having the wrong or outdated one—KDA has saved clients 10x their advisory costs by planning ahead.
Can I Still Act if My Estate Exceeds the Exemption?
Absolutely. While earlier planning is always easier, last-minute moves exist—ranging from disclaimer strategies, partial gifts, to even accelerated charitable contributions. Each has unique pros and cons, so schedule advisory review ASAP for tailored guidance.
This information is current as of 10/22/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later. For deeper details on estate tax strategy, visit our tax planning resource page. View our business structuring solutions and full range of KDA services.
Secure Your Legacy—Book Your Personal Estate Tax Strategy Session Now
Why gamble your family’s future on outdated plans or untested tax myths? Our advanced estate planning experts work exclusively with high-net-worth households to proactively manage California estate, business, and multi-generational tax risks. Get a custom action plan before exemption rules change—and protect what you’ve built from avoidable taxes, probate woes, and legal bottlenecks. Click here to book your confidential consultation now.
