If you own real estate, run a business, or have a high net worth in California, estate tax planning is no longer optional—it’s a necessity. Between rising property values, expiring federal exemptions, and California’s efforts to implement its own estate tax, the window to protect generational wealth is closing fast.
This guide will walk you through the estate and legacy tax landscape in California for 2025, including strategies to reduce estate tax exposure, avoid probate, and preserve wealth across generations—without losing it to tax drag or administrative chaos.
When it comes to preserving generational wealth, few topics are more urgent than estate tax planning California families can trust. With California’s high property values and aggressive probate system, even modest estates can trigger major tax liabilities without the right plan in place.
Quick Answer: What You Need to Know About Estate Taxes in California
- California currently has no estate tax, but proposals keep resurfacing
- The federal estate tax exemption drops dramatically in 2026 (from over $13M per person to ~$7M)
- If you own property, investments, or a business worth more than $7M, your estate could face a 40% federal tax on amounts above that limit
- Assets without proper planning (like LLCs, life insurance, and appreciated real estate) can increase your taxable estate
- Trusts, gifting strategies, and entity layering are your defense tools
High-net-worth Californians need to act before 2026 to lock in exemptions and protect their estate.
Why Estate Tax Planning Is a California Priority in 2025
1. The Sunset of the Tax Cuts and Jobs Act (TCJA)
Under current law, the federal estate tax exemption is $13.61 million per person ($27.22M per couple). But starting January 1, 2026, it’s scheduled to drop by half—likely to around $6.8M per person.
That means families with estates above that amount (including real estate, business equity, investment accounts, and retirement plans) could face a 40% federal estate tax on what exceeds the limit.
If your estate is worth $10 million post-2026, that’s roughly a $1.3 million tax bill—unless you plan ahead.
2. California’s Real Estate Bubble Creates Estate Creep
In the Bay Area, Orange County, and coastal San Diego, home values alone can push estates above $5M–$10M without the owner even realizing it.
- A $3.5M home
- $2M in retirement and stock accounts
- A $5M family business
- Some life insurance
That’s $10M+ in taxable estate—potentially subject to federal estate tax if planning is not done before 2026.
3. California Lawmakers Keep Pushing for a State Estate Tax
While California doesn’t currently have a separate estate tax, several bills have been introduced to implement one. While none have passed yet, it’s clear the state is exploring ways to tap into large generational wealth transfers.
If California follows states like Oregon or Massachusetts, the exemption could be as low as $1M to $2M, with a state-level estate tax layered on top of the federal rate.
4. Probate Is Still a Real Risk (Even Without Estate Tax)
Even if your estate avoids federal taxes, dying without a plan in California means your assets go through probate:
- Public, court-controlled, and expensive
- Can delay distributions to family by 12–18 months
- Can cost 3–5% of the estate in legal and administrative fees
A proper trust and entity structure can avoid probate completely, saving your heirs both time and money.
Bottom line:
Estate tax planning is no longer just for billionaires. If your net worth is $5M or more, 2025 is your final full year to lock in the current federal exemption and get ahead of potential California changes.
What Counts Toward Your Taxable Estate (And Why Most People Underestimate It)
Many Californians assume estate taxes only apply to the ultra-wealthy. But in reality, your “taxable estate” may be much larger than you think—especially once real estate, life insurance, and business interests are added up.
This section breaks down what the IRS and California regulators count toward your estate, and where most high-income families are caught off guard.
1. Real Estate (Primary + Investment Properties)
The full fair market value of your real estate holdings is included in your estate at the time of death. This includes:
- Your primary residence
- Second homes or vacation properties
- Rental properties (residential or commercial)
- Undeveloped land or farmland
Example:
If your home is worth $3.8M and you own two rental units valued at $1.4M combined, you already have $5.2M in estate value—before even considering other assets.
Even if you have a mortgage, only your equity is deducted when calculating estate value.
2. Business Interests
If you own an LLC, S Corp, partnership, or closely held corporation, your ownership share is counted toward your estate value. This applies whether you’re an active operator or a passive shareholder.
What’s included:
- Fair market value of the business at death
- Any capital accounts or retained earnings
- Real estate owned by the business
This often pushes estate values much higher than anticipated—especially for real estate professionals, service-based entrepreneurs, or family-run companies.
3. Investment Accounts and Retirement Funds
The following are all included in your taxable estate:
- 401(k)s and traditional IRAs
- Roth IRAs
- Brokerage accounts (stocks, bonds, ETFs)
- Cash reserves, CDs, savings accounts
While some of these accounts are tax-deferred during life, they’re still counted at full value for estate purposes.
Note: Roth IRAs aren’t subject to income tax on withdrawal—but they’re still included in the gross estate for estate tax calculation.
4. Life Insurance (Yes, Really)
Many families mistakenly believe life insurance proceeds are tax-free—and they are, from an income tax standpoint.
But if you’re the owner of the policy and die with it in force, the entire death benefit is included in your taxable estate.
That means a $2 million life insurance policy could unintentionally push your estate value above the exemption threshold—unless ownership is transferred or held inside an irrevocable life insurance trust (ILIT).
5. Other Assets That Are Often Overlooked
- Personal property (jewelry, art, collectibles, vehicles)
- Deferred compensation and RSUs
- Equity in startups or private equity
- Cryptocurrency and NFTs
- Annuities and cash value in insurance policies
Even assets without clear liquidity are still valued for estate tax purposes—and must be appraised, disclosed, and counted.
The Misconception That Gets People in Trouble
“I’m not rich enough to worry about estate taxes.”
This is the mindset that causes six- and seven-figure tax bills for California families. Between property appreciation and business growth, many people unknowingly cross the threshold—especially when exemptions shrink in 2026.
Bottom line:
If you live in California and have a net worth of $5M or more—including home, retirement, and life insurance—you’re in the estate tax conversation. The sooner you act, the more options you’ll have to protect your legacy.
Strategies to Reduce or Eliminate Estate Tax Exposure
Estate tax is not inevitable. With proper planning, you can significantly reduce or even eliminate what your heirs owe—while maintaining control of your assets during your lifetime.
Below are the most effective strategies high-net-worth Californians are using in 2025 to protect their legacy before the exemption sunsets in 2026.
1. Spousal Portability (for Married Couples)
If you’re married, you can effectively double the estate tax exemption—up to $27.22 million in 2025—by preserving the unused portion of the first spouse’s exemption.
To do this:
- File an estate tax return at the first spouse’s death
- Elect to transfer the unused exemption to the surviving spouse
This strategy is known as “portability.” It’s powerful, but it’s not automatic—you must file a return within 9 months of the first death to preserve the benefit.
2. Gifting While the Exemption Is High
The current lifetime exemption is $13.61 million (2025), but it’s scheduled to drop to about $7 million in 2026. The IRS has already confirmed that gifts made under the current limit will not be “clawed back.”
This creates a one-time opportunity to:
- Gift assets to children or trusts now
- Lock in the higher exemption while it’s available
- Use valuation discounts (for closely held business interests or fractional real estate shares) to gift more value using less exemption
Note: You can also use your annual gift exclusion ($18,000 per person in 2025) without touching your lifetime exemption.
3. Irrevocable Trusts (To Remove Assets from Your Estate)
Irrevocable trusts remove assets from your taxable estate while still allowing you to influence how and when beneficiaries receive them.
Popular options include:
- Irrevocable Life Insurance Trusts (ILITs) – Hold life insurance outside of your estate
- Spousal Lifetime Access Trusts (SLATs) – Benefit your spouse while removing assets from your estate
- Grantor Retained Annuity Trusts (GRATs) – Transfer appreciating assets with minimal gift tax
- Dynasty Trusts – Allow multi-generational wealth transfer, often paired with real estate or business assets
These trusts are flexible, powerful, and—if structured correctly—can provide estate tax savings and asset protection simultaneously.
4. Entity Structuring for Valuation Discounts
By holding real estate or business assets inside LLCs or FLPs (Family Limited Partnerships), you can claim valuation discounts for:
- Lack of marketability
- Lack of control
- Minority interest positions
This reduces the fair market value of gifted interests—allowing you to transfer more while using less of your exemption.
Example:
You own a $4M rental portfolio. If you gift a 40% minority interest inside an LLC, the valuation for gift tax purposes may only be ~$1.2M due to discounts—allowing significant estate reduction while maintaining management control.
5. Installment Sales to Grantor Trusts (Advanced)
This strategy involves:
- Selling appreciating assets (like real estate or business interests) to a grantor trust
- Receiving a note in return
- Freezing the value of your estate at the note amount while the asset grows outside your estate
It’s ideal for fast-growing companies, rental portfolios, or other appreciating assets you want to transfer before the exemption drops.
6. Charitable Planning (For Impact + Tax Savings)
Charitable strategies can help reduce both income and estate taxes:
- Charitable Remainder Trusts (CRTs) – Provide income to you or your heirs, with the remainder going to charity
- Donor-Advised Funds (DAFs) – Allow you to gift now, claim a deduction, and decide on charities later
- Qualified charitable distributions (QCDs) from IRAs (if 70½ or older)
Philanthropy can be a powerful tool to reduce taxable estate value while supporting causes you care about.
Bottom line:
You don’t need to lose wealth to estate taxes—you just need a plan. And with the 2026 exemption cliff approaching, 2025 may be your last chance to act before your options shrink.
KDA Case Study — How a Family Used Trusts and Real Estate Planning to Protect a $14M Estate
Client Profile:
- Family Name: Martinez Family (name changed)
- Location: San Mateo, CA
- Estate Value: $14.2 million
- Assets: Primary residence, three rental properties, investment accounts, a family-owned service business
- Goal: Avoid estate tax and ensure clean transfer of assets to their two children
The Problem
The Martinez family had built significant wealth over 25 years, primarily through real estate and their closely held business. But their estate plan hadn’t been updated in over a decade.
They were facing:
- Projected federal estate tax liability of $2.1M in 2026 (post-exemption drop)
- No trust for their business or real estate assets
- A life insurance policy that would push their taxable estate even higher
- No succession plan for their company
- Confusion among heirs about who would inherit what, and when
They wanted to keep the estate in the family, minimize tax exposure, and avoid burdening their children with a long probate or liquidity crisis.
The KDA Strategy
Here’s how we restructured their plan over six months:
- Established a Revocable Living Trust
- Avoided probate on all personal property
- Assigned successor trustees and clarified distribution terms
- Avoided probate on all personal property
- Transferred real estate holdings into an LLC
- Facilitated gifting to children with valuation discounts
- Streamlined estate liquidity and legal protection
- Facilitated gifting to children with valuation discounts
- Created a Spousal Lifetime Access Trust (SLAT)
- Moved $5.5 million in business equity out of the estate
- Preserved access to income while locking in the current estate exemption
- Moved $5.5 million in business equity out of the estate
- Purchased life insurance through an Irrevocable Life Insurance Trust (ILIT)
- Removed $2.5M death benefit from the estate
- Created liquidity to pay any future taxes without selling property
- Removed $2.5M death benefit from the estate
- Formed a Grantor Trust to receive discounted business shares
- Froze estate value at current fair market value
- Allowed the business to appreciate outside the taxable estate
- Froze estate value at current fair market value
- Filed gift tax returns and documented all transfers
- Preserved compliance and prevented future IRS challenges
- Preserved compliance and prevented future IRS challenges
The Results
| Outcome | Value Protected |
| Real estate removed from estate | $4.8M |
| Business equity discounted & gifted | $5.5M |
| Life insurance excluded via ILIT | $2.5M |
| Projected federal estate tax saved | $2.1M (2026 forecast) |
| Probate time avoided | 12–18 months |
| Family conflict risk | Greatly reduced |
Today, the Martinez family has:
- A full estate plan with clear asset protection
- Trusts that maintain privacy and control
- A plan to transfer real wealth—not just real assets—to their children
Client Reflection:
“We had the assets, but no plan. KDA gave us the structure, clarity, and confidence that our family would be protected—not burdened—when the time comes.”
Book Your Estate & Legacy Strategy Session
If your net worth is $5 million or more—and especially if you live in California—your estate may be exposed to federal estate taxes, probate delays, and unnecessary loss of generational wealth.
The upcoming 2026 exemption reduction gives you a limited window to act. Once the limit drops, your options shrink—and your tax exposure grows.
At KDA, we help high-net-worth families:
- Build trust structures to avoid probate
- Move life insurance and business equity out of their estate
- Use valuation discounts to maximize gifting
- Navigate complex multi-entity planning
- Coordinate with estate attorneys and CPAs to execute
- Create plans that preserve wealth without giving up control
What You’ll Get in Your Strategy Session:
- A full estate audit and asset exposure analysis
- A roadmap for trust, gifting, and exemption use
- Evaluation of your real estate, insurance, and business holdings
- A tax savings projection based on your estate value
- Answers to your family’s most important planning questions
This is not a cookie-cutter estate plan. It’s a proactive, California-specific strategy tailored to your assets, goals, and family legacy.
Your Wealth Deserves a Real Plan
Don’t let the IRS, FTB, or probate court decide what happens to your estate.
Get clarity, privacy, and protection—while there’s still time to act.
It’s not enough to draft a will. True estate tax planning California families need must factor in long-term asset protection, step-up in basis rules, capital gains avoidance, and legacy intent. At KDA, we don’t just help you transfer wealth—we help you protect it.
