Unlocking the True Estate Tax Rate in California: How High-Net-Worth Families Save Millions in 2025

This information is current as of 8/3/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

California’s elite face a ticking tax bomb. While most people believe the Golden State somehow double-taxes wealth through both “estate” and “inheritance” taxes, the rules—and the risks—are far more nuanced. For families with $10 million, $25 million, or $100 million in assets, the difference between guesswork and a precise understanding of the estate tax rate in California can mean the loss or preservation of generational wealth. Here’s what every high-net-worth individual (and their heirs) need to know, why most accountants get it wrong, and exactly how to use 2025’s legal landscape to keep millions in the family trust.

The estate tax rate California residents actually face isn’t from the state—it’s federal. In 2025, the IRS applies a 40% flat estate tax on assets above the $13.61M exemption per person ($27.22M per couple). That means if your estate is worth $50M and you haven’t used exclusions or trust strategies, your family could lose over $9M at death—even if you’ve never left the state.

Fast Tax Fact: Does California Really Have an Estate Tax?

Quick answer: As of 2025, California has no state-level estate tax. However, the federal government does, and wealthy families often trip over key thresholds. For Californians, your biggest risk is the federal estate tax—up to 40% over the exemption—plus overlooked state income tax traps when trusts or inherited property aren’t structured strategically (see IRS Estate and Gift Tax overview).

Why Most High-Net-Worth Individuals Still Overpay: Outdated Myths and Hidden California Risks

It’s a common story: a Newport Beach entrepreneur or San Francisco investor builds a fortune, hires a prominent attorney, and believes their estate is “set.” Decades later, the lack of an updated estate plan—reflecting current laws, accumulated real estate, and complex business holdings—leads to disputes, IRS audits, and multi-million-dollar federal tax bills. In 2025, the federal estate tax exemption sits at $13.61 million per person, but for couples and advanced trust strategies, the real savings can be orders of magnitude higher.

Most high-net-worth Californians misunderstand the estate tax rate California residents pay because the state collects none of it—but the IRS does. Without a plan, everything over your exemption is taxed at a flat 40%. This rate isn’t progressive like income tax; it hits hard and all at once. The IRS doesn’t care where you live if your estate is exposed

California’s unique community property rules, Prop 19 adjustment traps, and aggressive Franchise Tax Board (“FTB”) enforcement also mean your estate plan must factor in property tax reassessment, capital gains on inherited property, and the surge in IRS scrutiny for wealthy families.

3 Strategies That Move the Needle—And the Dollar Amounts at Stake

1. Gifting and the Lifetime Federal Exclusion (IRS Form 709)

• Each taxpayer can gift up to $13.61M (2025, per IRS) during their life or at death before triggering federal estate tax.
• Key move: Proactively gift assets—especially appreciating assets like real estate or private business stock—long before liquidity events or health concerns trigger urgency.
• Example: A Silicon Valley founder gifts $5 million of stock to an irrevocable trust in 2025. If those shares grow to $40 million, the gain occurs in the trust—avoiding estate taxation on the full amount at death. Heirs save $14 million+ in avoided estate tax (40% x $35 million gain).

The only way to legally dodge the 40% estate tax rate California families face at the federal level is through lifetime gifting or irrevocable trust transfers. Every dollar gifted now above the exemption avoids the IRS’s flat tax hit later. Timing matters—once exemption levels drop in 2026, you can’t retroactively shield the difference. That’s why strategic gifting before December 31, 2025, is the highest-ROI move available

2. Dynasty Trusts and the Long Game

• Unlike most states, California doesn’t restrict how long a trust can exist (“rule against perpetuities” was abolished via statute).
• Strategy: Set up multi-generation or perpetual “dynasty trusts” in favorable jurisdictions (e.g., Nevada, South Dakota) to avoid repeated estate taxation every generation.
• Example: LA family creates a Nevada dynasty trust funded with $18 million in commercial property. Over three generations, the trust structure prevents $16 million in repeat estate taxes and sidesteps Probate Court battles—see IRS Form 706 for estate filings.

3. Strategic Use of Irrevocable Life Insurance Trusts (ILITs)

• Life insurance, if owned by an ILIT, pays out completely estate-tax-free (kept outside the taxable estate).
• Strategy: Fund a $25 million second-to-die life policy through an ILIT, using annual exclusion gifts to cover premiums.
• Result: When the couple passes, heirs receive $25M free from both federal estate tax and California state income tax (if trust is structured with situs out of state). This move alone can save $10M+ in taxes.

Red Flag Alert: The Trap of Outdated Wills, Poor Coordination, and “California Conformity”

Many wealthy Californians—doctors, startup founders, property moguls—fail to update their plans. The result: non-conforming wills, uncoordinated trusts/beneficiaries, and accidental inclusion of assets in the taxable estate (e.g., IRAs or stock options without proper beneficiary designations). The IRS and California FTB cross-reference records more aggressively than ever in 2025. Failure to align your federal estate tax planning with California-specific forms (such as FTB Form 3520 for trust reporting) can result in penalties, audits, and protracted litigation.

The real danger isn’t that estate tax rate California laws are too high—it’s that families don’t align federal exemption strategies with California property and income tax structures. The FTB doesn’t impose an estate tax, but it audits aggressively and works with the IRS to find mismatches. Misfiled trust forms, unreported gifts, or property left outside the right structure still lead to huge losses—even without a state estate tax

Pro Tip: Even though California has no estate tax in 2025, poor trust structuring can trigger hefty property tax reassessment under Prop 19. Coordinate estate planning with income and property tax specialists who understand both state and federal nuances.

California Property and Trust Tax Pitfalls: More Than Just Estate Tax

California’s real estate values add complexity. When property is passed to heirs, reassessment under Proposition 19 can increase annual property taxes by $40,000 or more—on top of IRS exposure. Property that isn’t protected by an irrevocable trust or legal entity may also create additional state income tax on capital gains at death.

Your estate’s exposure isn’t just to the 40% federal estate tax. If, for example, a $6 million home in La Jolla is reassessed, heirs may lose $300,000+ in cash flow over 10 years to higher property taxes, while also risking step-up errors on capital gains that generate a $900,000 surprise IRS bill (see IRS Publication 523).

Where Most Advisors Slip: The Missed Power of California Community Property Trusts

Community property trusts give a “double step-up in basis” at the death of the first spouse, allowing heirs to later sell with little or no capital gains tax. Most out-of-state advisors default to simple living trusts—missing this critical benefit unique to California. For high-net-worth real estate investors, this alone can mean $500,000 or more in avoided capital gains taxes on every property transferred.

For further details, explore our comprehensive California Estate & Legacy Planning Guide.

Mid-Article Service Link: Proven Strategies for Keeping Wealth in the Family

If you want to explore the latest structures for asset protection, tax minimization, and legacy maximization, review our premium estate tax planning services for high-net-worth individuals. Our experts build bulletproof strategies tailored to California’s unique tax landscape, including irrevocable trust creation, real estate entity structuring, and multi-generational gifting plans.

What If Congress Changes the Federal Exemption? (Sunset Risk in 2026)

The lifetime federal estate tax exemption—the amount each individual can leave tax-free—drops sharply unless Congress acts. In 2026, the exemption may fall from $13.61M to around $7M. For couples, the lost shield is a staggering $13M—meaning $5M+ more in avoidable tax if you don’t lock in gifts or trusts ahead of time.

Action step: Complete major gifts and trust funding before December 31, 2025 to secure current exemption limits. The IRS has confirmed no “clawback” on properly structured 2025 gifts even if the exemption shrinks (see IRS estate tax FAQs).

KDA Case Study: Turning a $72M Tech Exit Into Lasting Legacy (High‑Net‑Worth Individual)

Persona: Tech founder, age 54, sold startup for $72 million in San Jose.

Problem: Client’s prior CPA and attorney assumed “no estate tax issue” because all assets were in California and in a basic revocable living trust. But the tech exit, plus real estate holdings, exposed $60M+ to federal estate and California property tax risk—despite no state-level estate tax. He also worried the 2026 exemption change would force heirs to sell properties to pay tax bills.

What KDA Did: We designed a staggered gifting and trust package:

• Moved $24M into a Nevada dynasty trust for the family’s heirs (protecting from probate and federal estate tax forever—see premium advisory services).
• Created ILIT and funded $10M in life insurance to provide estate liquidity tax-free.
• Reorganized $30M real estate into California community property trusts for double step-up in basis at first spouse’s passing.
• Coordinated 2025 gifts to use both spouses’ lifetime exclusions and annual exclusions for maximum leverage before the possible federal sunset.

Result: Projected estate tax reduction of $18.6M. Annual property tax savings for heirs: $120,000+. Fee paid: $60,000. First year ROI: 310x. Long-term legacy secured for three generations and full IRS compliance achieved for 2025 reporting cycle.

Common Pitfalls: Why the Richest Californians Still Miss Out

• Assuming no action is required “because California has no estate tax.” Federal law applies, and sunset risk is real.
• Allowing outdated trusts, missing updated beneficiary designations (especially after marriage, divorce, or liquidity event). This leads to IRS challenges and assets flowing out of the family tree.
• Failing to coordinate property, trust, and income tax rules. Example: inheriting a vacation home via will, rather than trust, subjects it to reassessment, higher taxes, and even forced sale for liquidity.
• Assuming all assets are protected if in a “living trust.” Wrong—only assets titled in the trust are protected. Missed assets count toward estate tax and can wreck your planning.

FAQs About California’s Estate Tax Landscape

Q1: Does California tax estates at the state level at all?

No. As of 2025, California has no state-level estate or inheritance tax for decedents dying this year—only the federal estate tax (see IRS Estate and Gift Taxes).

Q2: What’s the federal estate tax exemption for 2025?

$13.61 million per individual, $27.22 million per married couple when both use their full exclusions. Portability can apply with proper filings (Form 706) per the IRS.

Q3: What is Proposition 19, and why does it matter?

Prop 19, effective since 2021, drastically limits property tax protections for inherited real estate. Children/heirs now only preserve low tax basis if they move in as primary residence. Investment property generally gets reassessed at current (2025) value, raising annual taxes by tens of thousands per property (see California Board of Equalization: Prop 19).

Q4: Can non-Californians with CA assets be hit with CA estate tax?

No, but out-of-state heirs inheriting CA real estate may still trigger income and property tax when property is sold.

Red Flag: New IRS Scrutiny in 2025 for HNW Estates

IRS audit rates for high-value estates have ticked up. If Form 706 (estate tax return) or trust documents aren’t coordinated or list conflicting valuations/beneficiaries, expect increased scrutiny—especially with digital asset and cryptocurrency reporting now in IRS crosshairs. Keep records and professional advisory teams aligned (see IRS Estate Tax Audits).

What to Do Next: Lock In Today’s Rates and Build Robust Legacy Defenses

• Get a comprehensive review from a tax strategist and estate law expert with 2025 data—outdated strategies are liabilities.
• Update trusts, beneficiary designations, and property holding structures before year-end, especially ahead of 2026 law changes.
• Consider proactive gifts, ILITs, and/or dynasty trusts to maximize federal exclusions and minimize future tax exposure.

Book Your Estate Tax Strategy Session

If your net worth exceeds $10 million (or your projected estate will cross the new federal threshold in 2026), waiting could cost your family millions. Book a personalized estate tax strategy session and get a custom blueprint for trust structure, gifting, and legacy planning in California’s high-stakes environment. Click here to book your private consultation now.