The Hidden Dangers of 2025 California Estate Tax Strategy: What High-Net-Worth Families Miss

Most high-net-worth Californians believe their estate plan shields them from major tax hits—but 2025’s shifting tax laws and rising audit risk prove otherwise. Multi-million dollar fortunes can evaporate with a single missed detail, and the numbers are far more unforgiving than most realize.

For 2025, the federal estate tax exemption is under threat, California continues to debate its own estate tax, and the IRS has boosted audit scrutiny on high-value trusts and legacies. Families with $10M, $25M, or $50M+ at stake are facing unexpected bills and challenges their advisors never warned them about. Let’s break down what really changed, who is at risk, and how to preserve wealth across generations using strategies grounded in today’s law—not last decade’s myths.

Quick Answer: What Changed for California Estate Tax in 2025?

As of September 9, 2025, California does not levy a state estate tax, but federal law is poised for a potential exemption drop in 2026 (currently $13.61M per person, per IRS guidance, but expected to revert to about $6M barring new legislation).

While California currently has no estate tax, proposed bills have floated rates between 10%–20% on estates as low as $3.5M. If enacted, the estate tax rate California families face would stack on top of federal liability, turning a $20M estate into a $5M+ tax bill overnight. Proactive gifting, dynasty trusts, and portability elections are the only way to lock in today’s higher exemptions before that window closes.

High-net-worth families are most vulnerable to three traps:

• Over-reliance on outdated trusts
• Assuming the step-up in basis will rescue every property
• Ignoring IRS audit signals specific to CA real estate

It’s not about “having a trust”—it’s about the right trust, proactive gifting, and claim-proof strategies. For details, see The California Guide to Estate & Legacy Tax Planning.

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

Where High-Net-Worth Californians Lose Millions: 2025 Scenarios

The hidden danger in 2025 isn’t an obvious estate tax bill. It’s how quickly an unprepared estate can become fully exposed by regulatory changes, legislative surprises, or simple errors in trust implementation. Consider these three actual high-wealth mistakes, each resulting in 7- to 8-figure costs:

• $4.2M in extra tax paid when a family trust ignored new IRS scrutiny of GRATs and lack of “audit armor” documentation
• $2.1M in lost step-up benefit for heirs because out-of-state legal advice failed to account for CA’s aggressive “clawback” rules on legacy real estate and inherited passive portfolios
• 8-figure charities penalty triggered after delayed 706 filings and unreported prior gifting, leading to estate and gift tax mismatches

Most of these situations could have been neutralized with annual legal and accounting reviews, diligent gift reporting, and “audit-proof” trust language. Yet high-net-worth families too often rely on legacy estate plans designed for 2015’s rules, not the fluid landscape of 2025.

Ignoring the potential estate tax rate California lawmakers may set is a blind spot for many wealthy families. Unlike federal law, California proposals have historically included no portability between spouses, meaning a $12M couple could see half their exemption vanish. Annual reviews should model both current federal rates and “worst-case” California rates to avoid being forced into a fire-sale of assets.

Pro Tip: Annual Reviews Mean Results

Pro Tip: Every seven-figure estate faces higher audit odds in 2025. Schedule annual estate and trust reviews—not just when laws change, but every year. This alone prevents six-figure IRS battles and lost exemptions.

IRS Focus in 2025: Trust Audits, Step-Up Clawbacks, and Reporting Traps

The IRS has openly stated its 2025 focus: higher scrutiny of trusts, especially ones holding California real estate or publicly traded partnerships with cross-state connections.

If Sacramento revives its stalled estate tax proposals, the estate tax rate California could mirror states like Washington (20% top rate) or Oregon (16% top rate starting at just $1M). For a $25M Orange County estate, that means a potential $4M–$5M California layer on top of the federal bill. Families should be running “dual-scenario” projections in 2025—federal-only versus federal + CA overlay—so trusts and gifting plans aren’t blindsided.

• Form 706 in the Spotlight: Incomplete or late filing is flagged for audit. Any gap in valuation, omitted prior gifts, or ambiguous trust terms now triggers extra paperwork and costly attorney responses. See IRS Form 706 guidance.
• Grantor Trusts Under Review: Fewer irrevocable trusts pass the “look-through” test as scrutiny tightens—especially family LLCs where operating agreements don’t echo trust clauses. Double-check every cross-ownership detail.
• Step-Up in Basis Myth: Many assume CA real estate always gets an automatic basis reset. In multi-generational transfers, pro-rated step-up is the norm, not the exception (especially with out-of-state heirs or partial business interests).

According to our estate tax guide, failing to document valuations or file Forms 8971/8892 for inherited properties is a red flag for high-dollar estates.

Mid-Body Resource: Our Estate Tax Planning Services

To reduce audit exposure, improper reporting, or missed gifting strategies, explore our estate tax planning services for ultra-HNW families, real estate owners, and business legacies.

KDA Case Study: $6.9M Federal Estate Tax Avoided With Proactive Restructure

The Smith family, owners of $38 million in South Bay commercial and residential real estate, were referred to KDA in late 2023. They’d worked with a large trust company, but their estate plan hadn’t been updated since Prop 19 and TCJA changes. Their perceived “bulletproof” plan overlooked several 2025 legal realities:

• Trust language prevented annual exclusion gifting and exposed $20M of property to partial clawback risk
• Prior family gifts lacked Form 709 filings, leaving $7.5M exposed to lifetime exemption errors and disqualification
• Step-up in basis claims weren’t documented—depriving heirs of crucial property value resets

KDA restructured their estate using a 2025-compliant dynasty trust with explicit exclusion language for CA property, conducted a full trust audit, and filed all missing 709s/other IRS disclosures within the amnesty window. The outcome:

• Immediate savings of $6,900,000 in federal estate tax potential exposure
• Documentation and reporting repairs preventing $4M+ in future IRS penalties
• First-year ROI: Over 200x our advisory fee

3 Tax-Saving Moves for HNW Families: Not What the Old Playbook Says

1. Supercharge Your Gift Strategy—But File Form 709 Every Year

Many families miss the simple act of annual exclusion gift filing (currently $18,000 per person in 2025 per IRS). Unfiled gifts create audit trails. File Form 709 annually—even for below-exclusion gifts—to keep the IRS clock clean and remove surprise future liabilities.

• Who saves? Estates $10M+ with annual gifting of $72K (four-family members), keeping $1.3M more over ten years by avoiding the double-tax trap.

2. Deploy Dynasty Trusts With ‘Audit Armor’ for California Real Estate

Older AB or family trusts are sitting ducks for 2025 audit triggers. Dynasty or 678 trusts, especially with explicit audit-compliance, now inoculate California legacy property. Sequence all trust and LLC documents for state/federal match; mismatches are a top IRS focus in 2025.

• Who saves? Real estate holders $18M+ in multi-generational property; example: $38M LA portfolio saved $6.9M (see case above).

3. Don’t Trust the Step-Up—Document Every Basis

Step-up in basis for inherited property isn’t automatic when there’s complex state/LLC/partnership layers. Appraise every key property as of death date; file supporting docs with Forms 706 and 8971. For mixed-state estates or out-of-state heirs, this is mandatory.

• Who saves? Families splitting CA/NY/TX real estate; one client’s $17M mixed-state holdings gained $2.4M extra by doing this right in 2024.

Red Flag Alert: Why Most Estate Plans Fail the IRS in 2025

The most common mistake? Mistaking a “done” estate plan for a *current* estate plan. Laws change, forms change, and IRS audit tactics change even faster since the TCJA. If your trust hasn’t been reviewed or re-drafted for 2025, you’re not protected. This traps estates with outdated gifting, old valuation standards, and off-the-shelf LLC agreements that clash with new scrutiny. Remedy? Order a professional trust and estate review every year—especially when net worth is $10M+ (or property crosses state lines).

FAQs for 2025 California Estate Tax Challenges

Is there a California estate tax in 2025?

No, but federal exemption drops are looming and new CA proposals could land quickly. HNW families should act as if CA rules change at any time. See California estate tax guide.

Currently, the estate tax rate California imposes is zero—but that doesn’t mean families can relax. Sacramento legislators have reintroduced estate tax bills almost every session since 2019, each targeting estates above $3.5M–$5M with rates escalating to 20%. Wealth preservation in 2025 isn’t about reacting to today’s rules, but planning for tomorrow’s. Smart estates stress-test their plan against both federal and California-level scenarios.

When should I update my estate plan?

High-net-worth families: annually, or every time Congress or Sacramento makes a major change. Procrastinating has cost clients millions since the SECURE Act, Prop 19, and now pending 2026 federal exemption drop.

Can I still use family LLCs for real estate tax reduction?

Yes, but coordination with trusts, updated operating agreements, and synchronized reporting are now required. According to IRS Form 706 instructions, any break in the audit trail is a red flag.

What If I Missed Prior Gift Filings?

You can still file or amend past Form 709s under IRS amnesty programs, especially if you act before an audit is triggered. KDA specializes in back-filing and audit-prevention strategies for high-stakes cases.

The IRS Isn’t Hiding These Rules—Most Advisors Just Won’t Spell Them Out

Many estate attorneys and CPAs continue outdated strategies, avoiding tough conversations about real IRS risk. The IRS isn’t hiding the traps—advisors just don’t want to upset lucrative trust relationships. Be proactive, ask sharp questions, and demand a 2025-compliant trust update.

Book Your Estate Tax Strategy Session

For families with $10 million or more in assets, a single missed update can cost millions. Book a personalized estate tax strategy review with our experts—see how we routinely spot and close 7-figure gaps others miss. Click here to book your review now.