California Inheritance Tax Guide

California Inheritance Tax

California does not have an inheritance tax or a state estate tax. This is one of California's few tax advantages — beneficiaries who inherit assets from a California decedent do not owe California tax on the inheritance itself. However, California does tax income generated by inherited assets after the date of death, and California's income tax rates (up to 13.3%) apply to that ongoing income.

Federal Estate Tax vs. Inheritance Tax

The federal estate tax is paid by the estate (not the beneficiaries) on the total value of assets transferred at death above the exemption amount. The OBBBA permanently extended the higher estate tax exemption: $13.99 million per person ($27.98 million for married couples) for 2025, adjusted for inflation. At these exemption levels, only very large estates owe federal estate tax. An inheritance tax (paid by beneficiaries) exists in some states but not in California or at the federal level.

Inheriting from Other States

If you inherit from someone who lived in a state with an inheritance tax (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania), you may owe that state's inheritance tax even though you live in California. The tax is based on the decedent's state of residence, not the beneficiary's. Rates and exemptions vary by state and by the beneficiary's relationship to the decedent. KDA can analyze the tax implications of out-of-state inheritances.

Income Tax on Inherited Assets

While the inheritance itself is not taxable, income generated by inherited assets is taxable. Interest, dividends, and rental income from inherited assets are taxable to the beneficiary from the date of inheritance. If you sell inherited assets, any gain above the stepped-up basis is taxable. Required Minimum Distributions (RMDs) from inherited IRAs are taxable as ordinary income. KDA helps beneficiaries understand the ongoing tax implications of their inheritance and plan accordingly.

Step-Up in Basis

One of the most valuable tax benefits of inheriting assets is the step-up in basis. When you inherit an asset, your cost basis is "stepped up" to the fair market value on the date of death (or the alternate valuation date). This means you can sell the inherited asset immediately after inheriting it with little or no capital gains tax — regardless of how much the asset appreciated during the decedent's lifetime. For a California home purchased for $200,000 that is worth $1 million at death, the beneficiary's basis is $1 million — not $200,000.

Planning for Inheritance

KDA's planning recommendations for beneficiaries: (1) Do not sell inherited assets immediately — understand the tax basis first. (2) Update beneficiary designations on any inherited retirement accounts. (3) Understand the RMD rules for inherited IRAs — the SECURE Act 2.0 changed the rules significantly. (4) Consider whether a disclaimer (refusing the inheritance) makes tax sense in your situation. (5) Plan for the income tax on inherited IRA distributions — large inherited IRAs can push you into higher tax brackets for years.