How California High-Net-Worth Families Can Avoid Six-Figure Mistakes With the 2025 Estate Tax Threshold

Imagine you’ve built $17 million in wealth—real estate, investments, a family business. Then, one legal misstep or a knowledge gap around California’s estate tax threshold quietly kills $900,000 in value for your heirs. It happens to high-earning families every year. Even the sharpest investors and business owners can overlook critical moves, especially with California’s ever-changing tax landscape and the federal estate exemption looming to sunset in 2026. For high-net-worth Californians, ignorance isn’t just costly—it’s generational. Let’s break down how to avoid the six- and seven-figure estate tax traps lurking in 2025, with clear numbers, plain language, and real-world strategies.

Quick Answer: Estate Tax Opportunity & Red Flag in 2025

The estate tax exemption in California follows the federal threshold—currently over $13M per individual, but set to drop by half in 2026 unless Congress acts. For 2025, wealthy families have only months left to transfer, gift, or restructure assets before the window closes. Miss this window, and estates above the new threshold could face 40% or more in combined federal and potential state-level taxation. The bold move: Use 2025 to lock in lifetime gifts, dynasty trusts, and advanced planning vehicles to future-proof your estate.

The most misunderstood aspect of the estate tax threshold california is that while the state currently has no active estate tax, several legislative proposals have targeted estates above $3.5 million. This means California families who assume they’re safe because their net worth is under the federal limit could face double exposure in the near future. Strategists are now advising clients to model two scenarios—federal sunset at $7M per person and potential state reintroduction—to stress test legacy plans before 2026.

Why the 2025 Estate Tax Threshold Is a Trap for Wealthy Californians

Most high-net-worth individuals (HNWs) assume that the estate tax only applies to the ultra-wealthy. In reality, the federal exemption of $13.61M per individual (or $27.22M for married couples) is scheduled to revert to approximately $7M (or $14M combined) in 2026 without new legislation. That change exposes hundreds of families who never thought they’d owe estate tax.

Key numbers: Let’s say you own $15M in assets today. If you die in 2025, your heirs may avoid estate tax entirely. If you die in 2026 or later—without acting—your estate could owe roughly $3.2M (40% of $8M above the reduced threshold) to the IRS.

Fundamental estate planning mistakes that create seven-figure losses often include:

• Failing to use lifetime gift exclusion before it shrinks
• Not using state-specific strategies in high-tax states like California
• Neglecting to review outdated trusts that don’t reflect community property law or portability rules

For a detailed breakdown, check our California estate and legacy tax guide.

KDA Case Study: High-Net-Worth Entrepreneur Avoids $3.2M Estate Tax Hit

Maryam, a Los Angeles business founder, had accumulated $16.5M in commercial property, investment portfolios, and a closely held business after a 30-year career. Like many HNWs, her revocable trust was last reviewed in 2016 and didn’t leverage the double exemption for married couples or recent California residency tax planning moves.

When Maryam came to KDA, her situation looked secure—until we stress-tested her estate against the 2026 federal estate tax schedule. By modeling the sunset scenario, we saw that her heirs would lose an estimated $3.2M in estate taxes if she passed away after the exemption dropped, due to underutilizing spousal portability, missing lifetime gifts, and lack of California-specific planning for her jointly owned properties.

Our team:

• Transferred $6M in business and real estate assets to dynasty GST trusts using the current, higher exemption
• Created a spousal access trust (SLAT) to protect $5M and maintain family control
• Filed portability election for her late husband’s unused exemption, securing an extra $6.8M
• Adjusted all documents to California community property rules, maximizing stepped-up basis rules (see IRS Publication 555)

Her heirs’ projected estate tax: $0 for 2025—down from $3.2M.

Total strategy costs: $18,000 in advanced legal planning. First-year ROI: 177x. Lifelong benefit: tens of millions preserved for the next generation.

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.

Community Property, Step-Up Basis, and California-Specific Estate Traps

California is one of only nine community property states. For married couples, this brings unique estate planning opportunities—and traps. Community property receives a full step-up in basis when either spouse dies, resetting capital gains on all jointly held assets. But if titling or documents are wrong, your heirs can lose this automatic boost, paying hundreds of thousands more in capital gains.

Example: The Chang family held a $4M primary residence titled only to Mr. Chang, despite living in California for 12 years. When he died, only half the home received step-up basis, resulting in a $750,000+ unexpected capital gains bomb if sold. KDA’s legal review could have avoided this loss by properly retitling and updating documents (IRS Publication 523).

Pro Tip: Never assume your revocable trust or out-of-state documents “work in California.” Every HNW client should have all estate and trust documents reviewed annually or after every major life event.

Leverage Lifetime Gift Exemptions Before the 2025 Window Shuts

Here’s the little-shared secret: The IRS confirmed in Notice 2019-20 that lifetime gifts using today’s higher exemption are locked in, even if the exemption later drops. If you gift $13M in 2025 and the threshold drops to $7M in 2026, your prior gifts remain sheltered.

This “use it or lose it” window can generate millions in family savings but only when implemented strategically. Consider Warren, a tech executive with $18M in stock options. His KDA advisor structured an irrevocable trust and made an $8M completed gift in 2025. If he delayed, $1.9M would vanish to estate tax at death due to the lower exemption.

Key steps HNWs should take now:

• Evaluate all family net worth and asset growth projections
• Create irrevocable or dynasty trusts to lock in high exemption
• Consider gifting strategies involving LLCs, partnerships, or minority discounts—especially for rapidly appreciating assets
• Work closely with California estate counsel to comply with state community property rules

For high-net-worth individuals, failing to make gifts or retitle assets in this narrow window is the most costly mistake of the coming decade.

Common Pitfall: Outdated Trusts and Missed Portability

An astonishing number of high-net-worth families still rely on trusts that predate modern exemption levels, portability, or updated beneficiary designations. The SECURE Act, Tax Cuts and Jobs Act, and state-specific law changes have all upended legacy planning. In California, a simple failure to elect portability (using IRS Form 706 within nine months of death) can cost a surviving spouse $6.8M in lost estate tax shelter.

Trustees and executors must review all documents for:

• Correct alignment with California community property laws
• Accurate and up-to-date beneficiary lists
• Qualified disclaimers and use of marital deduction planning
• Provisions for portability and GST (generation-skipping) tax allocations

Learn more about Form 706 and portability elections here.

Service Spotlight: Preserve Your Wealth With Premium Advisory Planning

Don’t risk losing decades of gains to poor planning or unforced errors. Our premium advisory services are designed for complex California estates and high-net-worth families needing comprehensive guidance— before and after major life events.

For a foundational guide to advanced legacy moves, reference our California estate and legacy tax guide.

FAQ: Estate Tax Planning for California HNWs

What is the 2025 estate tax threshold—and when does it change?

For 2025, the federal exemption per person is $13.61M, scheduled to revert to approximately $7M per person in 2026. California currently has no separate state estate tax, but proposals exist. See the IRS Estate Tax page for current law.

How does community property affect my estate tax planning?

California community property law gives married couples both special opportunities (full step-up in asset basis at first death) and risks (if titling or trusts are wrong). Asset reviews are mandatory—see IRS Pub 555 for details.

Can I “lock in” the current exemption with gifts?

Yes. Strategic gifting in 2025 uses the higher exemption. According to IRS guidance, gifts made now are not clawed back if exemption later drops.

Red Flag Alert: Emerging California Estate Tax Proposals

While California does not currently impose a state estate tax, recurring bills aim to create one for estates above $3.5M. The next few years may see significant state-level changes that catch unprepared families off guard. As always, plan for both federal and California outcomes, and review plans annually to keep up with legislative trends (see our premium advisory offerings).

What If You Move States? How Does That Affect California and Federal Estate Tax?

Relocation significantly impacts estate tax exposure. Move to a state with its own estate/inheritance tax, and your liability may rise. California’s laws around community property and trust taxation are especially complex after a move—always conduct a full review.

Book Your Personal Wealth Legacy Session

If you have $7M+ in assets, every year you delay planning risks losing up to 40% to federal and—potentially—California estate taxes. Schedule your private, strategy-first consultation and ensure your lifetime work isn’t lost to the next legislative shift. Click here to reserve your confidential session now.