How the Estate Tax Rate in California Really Impacts Your Legacy—and the Wealth Strategies No One Tells You

Most high-net-worth Californians believe estate tax is a future problem. Reality: one missed planning move could cost your heirs over $6 million in 2025 alone. Meanwhile, advanced strategies routinely overlooked by even the best-compensated advisors can legally reduce or eliminate estate tax liabilities. If your estate planning hasn’t kept pace with recent federal and California tax changes, your legacy is at greater risk than ever.

This information is current as of 9/23/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

Quick Answer: What Is the Estate Tax Rate in California for 2025?

For 2025, California does not impose a separate estate tax. Only the federal estate tax applies, which sits at a top marginal rate of 40%. The lifetime exemption has been raised to $15 million per individual under the “One Big Beautiful Bill Act,” set through 2025. Any assets above that threshold are subject to the federal rate—meaning a $25 million estate could trigger a $4 million+ tax bill if not planned properly. (See the California Guide to Estate & Legacy Tax Planning for advanced breakdowns.)

Federal Estate Tax vs. California Wealth Transfer Rules

There’s a persistent myth that California’s “death tax” will eventually return. For now, only federal rules apply—but the way assets are structured in California can change your final bill. Here’s what every high-net-worth family needs to know as of 9/23/2025:

• Federal Exemption (2025): $15,000,000 per person ($30M per couple) [IRS estate tax reference]
• Top Federal Rate: 40% on assets over exemption
• California: No separate estate or inheritance tax (2025)
• State Income Tax: Still impacts trust income and certain distributions

Key takeaway: Even with no state estate tax, California’s high income tax environment still eats away at multi-generational trusts (with non-grantor trusts facing rates up to 13.3%). Structure matters more than ever. To understand the full landscape, check out our premium advisory services for complex estates.

Advanced Strategies to Reduce Your Exposure to Federal Estate Tax

The best estate tax plan is proactive—waiting until “it’s time” can cost your family millions. The law is getting stricter on valuation, discounting, and post-2026 exemption cuts. Here’s what works in 2025—and what many high-net-worth families miss:

• Spousal Lifetime Access Trusts (SLATs): Place up to $15 million (per spouse) into an irrevocable trust while retaining spousal benefit. Avoids direct gift/estate tax, especially effective for business interests.
• Dynasty Trusts: Lock in the 2025 exemption before sunset. Assets remain shielded from estate tax for multiple generations.
• Grantor Retained Annuity Trusts (GRATs): Shift appreciating assets out of the estate with little to no gift tax—most effective when valuations are low or asset growth is expected.
• Family Limited Partnerships (FLPs): Use valuation discounts for minority/marketability to gift assets below FMV, stretching exemption further.
• Charitable Lead/Remainder Trusts: Deduct substantial assets, support causes, and pass remainder to heirs tax-advantaged. Ideal for estates of $30M+.

For a comprehensive guide on these structures, reference the California estate and legacy tax pillar article.

KDA Case Study: High-Net-Worth Family Avoids $7.3M Estate Tax Trap

A Southern California family (husband and wife, combined net worth $44 million, real estate and private business holdings) came to KDA in early 2025 concerned about future estate taxes as their children inherited parts stake in two commercial properties.

• Problem: Their prior estate attorney set up basic living trusts but failed to utilize dynasty trusts or valuation discounting.
• Our Move: We restructured their holdings into family LLCs, established two SLATs for $13M each, used FLPs on remaining real estate, and implemented a charitable remainder trust for legacy giving. Our team managed proactive documentation for IRS scrutiny (appraisals, FLP minutes, trust operating agreements).
• Result: $27M shifted out of their taxable estate within exemption rules, total estate tax projected to drop by $7.3 million over next decade.
• Cost: $46,000 (legal, tax, strategy fees). ROI: 157x (first-generation savings alone).

Why Most Californians Still Lose to the Federal Estate Tax Rate in 2025

Common Mistake: Many rely on basic revocable trusts, thinking they avoid estate tax. In fact, living trusts only ensure probate avoidance—not estate tax protection. The IRS routinely audits large California estates for valuation discounting (see official guidelines), and out-of-date appraisals or missing FLP records result in quick penalties.

Red Flag Alert: In 2024, IRS challenged $1.4 billion in improper asset transfers after exemption claims were misapplied.

Trap: If your assets jump above $15M ($30M for couples) by even $100,000, 40% of the overage (that’s $40,000 on just $100K) goes to the IRS, not your family. Once the 2026 “sunset” hits, the exemption could fall to $6-7M/individual.

Pro Tip: Ongoing Compliance Is the Multiplier Most HNW Families Miss

It’s not enough to just set up estate structures—you must maintain rigorous documentation:

• Annual trust and FLP meetings, properly recorded
• Audit-proof appraisals at transfer and every 5 years
• Gifting logs and Form 709s filed for all gifts over $17,000/year (2025 limit—reference IRS Form 709)
• Tracking any GRAT or SLAT distributions for compliance

Strong compliance not only survives IRS audits but also strengthens your negotiating leverage if the agency reviews your return. Our clients discover this can save $120K+ in audit dispute and penalty costs alone.

What Happens If You Don’t Act Before the 2026 Exemption Sunset?

The clock is ticking. If Congress lets the current exemption fall from $15M to the pre-TCJA level (about $7M), a $20M estate would pay $5.2M more in taxes—unless you lock in moves before year-end 2025. This window is closing.

• Use up your full $15M exemption with gifts and trust funding now—future “clawback” protections are unclear.
• Transfer rapidly appreciating business or real estate while valuations are still moderate.
• Review and update old trust docs and appraisals before next family event or change in family status.

Linking Your Legacy and Your Business: How California’s Tax System Can Work for You

California earns its reputation for aggressive income and business taxes, but careful business structure planning can compensate for the lack of a state estate tax. LLCs, S Corps, and FLPs, when used with current estate tax planning strategies, can:

• Lower taxable estate values using legitimate discounts
• Shield family business voting/control from outside creditors and ex-spouses
• Drive down operating income taxes via strategic distributions

To see how your business exits or real estate liquidations affect estate taxes, check our estate tax planning services.

What If You Own Real Estate in Multiple States?

Owning property outside of California opens up exposure to that state’s estate or inheritance taxes. For instance, your Nevada property may be free of estate tax, but a New York rental could create new filing and payment obligations, even if your domicile is California. Multi-state planning is never plug-and-play—this is where coordinated CPA, legal, and valuation teams matter most.

For integrated approaches, see our definitive California estate tax guide.

FAQs: Estate Tax Rate in California and Advanced Planning

What is the estate tax exemption for 2025?

For 2025, federal exemption is $15 million per individual. California does not offer separate exemption or estate tax.

Does a revocable living trust protect me from the federal estate tax?

No. It protects against probate, not against the federal estate tax. Further planning—like irrevocable trusts or FLPs—is required.

How does gifting work for estate tax savings?

You may give up to $17,000 per recipient annually in 2025 without using up your lifetime exemption. Larger gifts require Form 709 and reduce your exemption—but many strategies let you “stack” gifts via family entities at lower values (see valuation discounts in IRS rules).

What if the federal exemption drops after 2025?

Early, proactive planning ensures the moves you make now are ‘grandfathered’ in even if the exemption later drops. This is known as anti-clawback protection. But don’t delay—timing must be precise for full benefit.

Book Your Legacy Tax Strategy Session

If your estate planning hasn’t addressed new federal exemption limits or multi-generational legacy moves, you’re leaving millions at risk. Maximize your $15-million window and defend your family’s wealth. Book your personalized estate tax strategy session today.