Legacy or Liability? Your 2025 Guide to Federal vs California Estate Tax for High-Net-Worth Families

If you’re a high-net-worth individual living in California, the phrase ‘estate tax’ either means uncertainty or strategic opportunity. 2025 is different: new state-level proposals, shifting federal exemption limits, and renewed IRS scrutiny mean your estate plan deserves real scrutiny. It’s not just about avoiding unnecessary taxes—it’s about turning a potential liability into a wealth legacy that supports your family for decades.

Fast Answer: Federal vs California Estate Tax in 2025

Federal estate tax currently applies to estates exceeding $13.61 million per individual (as of 2025). California, for now, has no active estate tax—but proposed legislation could change this fast. High-net-worth families risk $3M–$10M in preventable estate taxes without agile planning. For the latest, see our complete California estate & legacy tax guide.

While the federal vs California estate tax distinction seems simple, the real exposure lies in how both systems interact. The federal estate tax—governed by the IRS under Title 26, Subtitle B—applies nationwide at a 40% rate above the $13.61M exemption in 2025. California currently imposes no estate tax, but the state constitution allows reactivation through legislative action or voter initiative. If lawmakers enact the pending proposals, estates over roughly $3M could face a combined effective rate exceeding 45% when federal and state liabilities stack.

This information is current as of 10/28/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

Why Federal Estate Tax Rules Still Bite in California

Most wealthy Californians assume state estate taxes aren’t an issue. But here’s the real problem: while the federal exemption is high now, it’s set to drop in 2026 (possibly cut in half). The IRS will scrutinize gifts, trusts, and asset transfers more closely than before. If you pass away with a $25M estate in 2025, and Congress halves the exemption in 2026, your family could lose $4.5M or more overnight if your plan is outdated.

The biggest planning advantage comes from preemptive action before exemption sunset. For wealthy Californians, synchronizing federal gifting and trust strategies now protects against both IRS changes and any state-level tax revival. The federal vs California estate tax gap gives a temporary window for tax-free transfers—but once the federal limit drops in 2026 and California adds its own layer, retroactive taxation could effectively erase 15–20% of net estate value. Filing portability elections (Form 706) and executing GRATs or SLATs now locks in today’s superior terms.

• 2025 Federal exemption: $13.61M per person ($27.22M married); 40% tax rate above that
• Heirs pay tax in cash—forced sales of assets are common
• Strategy: Use gifting, trusts, and portability to lock in today’s exemption

According to IRS estate tax guidance, portability lets surviving spouses use leftover exemption, but only with timely filings. This is where most families miss out—and the IRS doesn’t send reminders.

KDA Case Study: High-Net-Worth Family Avoids $9.3M in Federal Estate Tax

The Reynoso family, residing in Palo Alto, built their $32M net worth through tech investments and real estate. In early 2025, with rising political talk about reducing estate tax exemptions, they worried about leaving a massive tax bill for their heirs. Their previous estate plan had not locked in portability or leveraged lifetime gifts.

KDA’s estate tax team executed a “use it or lose it” gifting plan, creating grantor-retained annuity trusts (GRATs) and spousal lifetime access trusts (SLATs) for each spouse. Together, they transferred $13M of assets out of their estate before exemption sunset. Projected savings: $9.3M if exemptions revert in 2026. Total planning cost: $45,000. ROI: Over 200x in first-generation wealth retained. The family’s biggest regret was not acting sooner, as their friends who waited face an uncertain tax future.

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.

Will California Bring Back Its Estate Tax?

State lawmakers have renewed proposals for a revived California estate (inheritance) tax aimed at ultra-high-net-worth residents. While nothing is passed as of October 2025, bills targeting estates over $3M–$5M have support—and budget shortfalls make action likely. Even if you relocate assets or trust headquarters out of state, “California-situs” rules could bring those assets right back into the tax crosshairs. Don’t assume residency change or Nevada trust will shield everything; California’s FTB has aggressively challenged strategies judged as ‘evasion’ rather than ‘avoidance.’

• Track state-level bills and get ahead of likely audits
• Model the impact if exemption drops or new CA tax passes
• Update powers of attorney and trust language now

For the latest, explore our estate tax planning services—we proactively model “what-if” scenarios for all clients facing seven- and eight-figure decisions.

Advanced Tactics: Outpacing Federal and State Risk with Pro Strategies

With both Washington and Sacramento in flux, relying on generic trusts isn’t enough. Asset location, charitable giving plans, family partnerships, and dynamic gifting are essential. For example, a restricted LLC can “freeze” the value of assets before any legislative changes. Charitable remainder trusts can slice tax bills by 30% or more—and still provide family members with income and future control. The key is timing: gifts made before sunset lock in benefits, while those after depend on far stingier rules.

In 2024, we saw the IRS challenge more non-arm’s-length transactions than in any prior year, and California’s Franchise Tax Board followed with matching enforcement. Quoting IRS Publication 559, “Executors must attach full documentation to estate returns; improperly documented transfers are subject to full tax.” Don’t wait until news headlines force panic.

Red Flag: Why Most HNW Families Leave Millions on the Table

The number one mistake? Waiting until ‘next year’ because “there’s still time.” Most high net worth Californians believe there’s a warning before rules change—but sunset clauses and state votes can take effect retroactively. The second mistake: failing to file IRS Form 706 within nine months after death to secure spousal portability. This single oversight can permanently forfeit $13M+ in tax shelter for heirs.

• Don’t miss the 9-month Form 706 deadline (see IRS Form 706 guidance)
• Don’t assume California will always lack an estate tax
• Don’t rely on old trust language—update it for 2025 and proposed state bills
• If your estate exceeds $13M, plan as if exemption drops in 2026

Pro Tip: Even modest charitable gifts can boost exemptions and reduce potential CA exposure if new state taxes appear. Have your tax advisor coordinate every move with your estate planning attorney.

FAQ: Federal and California Estate Tax Rules for 2025

What’s the current federal estate tax exemption?

The federal exemption is $13.61 million per individual for 2025. Estates above this amount pay a flat 40% tax on the excess (see IRS estate tax).

Is there a California estate tax in 2025?

No, but legislative proposals are active. Watch developments—future taxes could apply to estates over $3M–$5M.

How do I preserve my current exemption if the law changes in 2026?

Utilize lifetime gifts, trusts, and other advanced estate planning by late 2025 to ‘lock in’ today’s limits. Consult an expert to coordinate the required filings and documentation.

Will trust assets outside California escape state estate tax?

If you are a California resident, “situs” rules may still apply to many out-of-state assets. California authorities are expected to challenge weak out-of-state trust structures, especially those implemented only for tax avoidance. Review your trust location and asset types with a strategist.

What IRS rules should I know?

Portability and timely Form 706 filing are critical. See Form 706 instructions and Publication 559 for executor duties.

What’s the Simplest Way to Model My Estate Plan Risks?

Start with a full asset inventory and multi-scenario model:

• Model estate tax with current federal exemption
• Model impact if exemption is halved in 2026
• Model additional tax if CA passes a state estate tax (assume 12–16%)
• Tweak gifts, trusts, and charitable donations each scenario

We provide these risk forecasts in every estate plan review. Don’t trust static documents or “one-and-done” will kits—an annual update could save millions.

Busting Myths: Estate Tax Avoidance vs. Evasion in California

Moving to Nevada, adding kids as co-trustees, or rapid gifting just before death won’t protect against all tax liabilities. Asset “situs” and ownership documents matter more than state of incorporation. The IRS and California FTB look at substance over form: if you control the assets, they can tax them. Don’t believe anyone promising bulletproof “out of state” escapes—most are unproven and many have failed in court (see IRS audit statistics for 2024–2025).

For additional clarity, review our comprehensive California estate tax planning guide for advanced tactics specific to high-net-worth individuals.

Ready to Secure Your Legacy Now?

Don’t gamble your family’s wealth on shifting tax politics. A proactive, expertly updated estate plan is the difference between a generational legacy and a multi-million dollar government check. We’re ready to build your model, file the right forms, and optimize your asset structure down to the last detail. Click here to book your elite estate tax strategy consultation and preserve what you’ve built.