The Real Cost of Wealth: How the Estate Tax Rate in California Impacts High-Net-Worth Families

Estate tax rate california is a phrase that sparks late-night anxiety for high-net-worth individuals, especially as legislative winds shift post-election. The myth? If you live in California, your heirs face a confiscatory state estate tax. The reality: there are more loopholes, federal overlays, and transfer traps than most wealthy families hear at those smooth-talking trust seminars—and ignoring them can cost you millions.

Here’s what California’s (and the federal government’s) estate tax rules actually look like in 2025, who’s at risk, and exactly what advisors at KDA Strategies tell HNW clients in their $5M, $20M, and $50M+ range to do about it—down to the dollar.

Quick Answer: Does California Have an Estate Tax—And What’s the Real Risk?

California currently does not have a state-level estate tax as of 2025. That means only the federal estate tax applies—at a 40% top rate for estates above the federal exemption ($13.61 million per individual for 2025, with inflation adjustments). But here’s the trap: potential future state tax proposals, aggressive transfer taxes elsewhere, and California’s uniquely high real estate values mean HNW families can face sudden exposure that out-of-date plans and vanilla trusts won’t cover.

Why “No California Estate Tax” is Not the Full Story

The estate tax rate in California is NOT a myth, but a moving target. While there’s no estate tax today, there have been persistent—almost annual—bills proposing a 12-20% state-level estate tax on top of the 40% federal rate. These haven’t become law, but with California’s budget needs and wealth disparities, the threat is real. KDA tracks this landscape for clients year-round.

Example: A $20M estate with $12M in real estate, $5M in a business, $3M in cash. The federal estate tax alone above the exemption could exceed $2.5M (40% of $6.39M over the $13.61M threshold). If a state tax were passed at 16%, that’s nearly an extra $1M loss—almost all avoidable with proper planning. Our premium estate tax planning services dig into these projections in detail.

Breaking Down the 2025 Federal Exemption, Gifting & Portability

Let’s get specific: For 2025, each individual can shield up to $13.61 million from federal estate tax, or $27.22 million per married couple if both spouses ‘port’ the exemption (IRS Estate Tax guidance). This is down the line set to sunset: unless Congress acts, the exemption drops in 2026 to about $7 million per individual—pulling thousands more California families into the 40% estate tax net.

• Gifting annual exclusion (2025): $18,000 per recipient, unlimited recipients, per year (see IRS Gift Tax rules).
• Portability: If spouse dies, surviving spouse can ‘port’ unused exemption for combined $27.22M in 2025. But, key filings required within 9 months (Form 706).

Bottom line: For a $30M family (2 spouses, 2 children), you can pass on over $27M without a federal hit in 2025—with careful execution. But slip up, miss the deadline or fail to structure gifts, and you lose the higher exemption permanently.

Don’t Miss the Hidden Traps: Why Most Wealthy Californians Overpay on Estate Tax

The biggest mistake? Relying on outdated revocable trusts drafted pre-2017 and not layering advanced strategies. In 2024 alone, KDA found over 35% of California HNW estate plans missed crucial steps for exemption maximization. Here’s how the costs add up:

• Failure to lock in exemption before the 2026 cutoff: Up to $2.64M in unnecessary estate tax (for a married couple whose net worth exceeds $15M).
• Not using dynasty trusts or GST planning: Families with grandchildren lost another $800K due to skipped generation taxes via simple living trusts.
• Poor record-keeping for lifetime gifts: IRS audits have increased focus on irregular gifting (see Gift Tax Exclusion).

Solution: Bring every estate plan up to speed by year-end 2025. Don’t let California’s “no estate tax” lull your strategy.

Pro Tip: Use Grantor Retained Annuity Trusts (GRATs), SLATs, & Discount Transfers

For HNW clients, advanced structures like Grantor Retained Annuity Trusts (GRATs), Spousal Lifetime Access Trusts (SLATs), and discounted family business transfers (see IRS guidance) are gamechangers. In 2024–25, KDA helped a tech entrepreneur transfer $15M in pre-IPO shares using a GRAT, saving over $2.3M in anticipated estate tax—even with no California estate tax today.

Discount strategies (e.g., transferring non-controlling interests at 20-30% below market) let families move real estate, LLC, or business assets well below appraised value for tax purposes. The IRS allows this via formal valuation (Publication 561).

Red Flag Alert: Why Your Living Trust Isn’t Enough in California

Classic mistake: Assuming a living trust avoids estate tax. It does not—only probate. The IRS taxes everything above the exemption—including real estate, business equity, and even out-of-state assets. In 2023, the IRS audited over 16,000 estate returns, flagging living trusts missing gift logs, accurate fair-market appraisals, and proper spousal elections (see IRS audit guidance).

What works: Layer your living trust with tax-driven vehicles like SLATs, irrevocable life insurance trusts (ILITs), or QTIP trusts for blended families. Each tool protects assets beyond the basic trust’s reach.

KDA Case Study: High-Net-Worth Family Leverages Advanced Estate Planning in California

The Chens, a Newport Coast family with a $34M diversified portfolio ($20M in CA real estate, $10M business, $4M marketable securities), came to KDA after hearing rumors of an impending California estate tax. Their existing living trust (from 2011) would have left their heirs $5.6M exposed if the federal exemption dropped post-2025. Our strategists:

• Set up two SLATs (one per spouse) funded with $8M each, locking in the full 2025 exemption.
• Transferred the business to a family partnership, enabling valuation discounts of $1.6M.
• Moved $4M to an irrevocable life insurance trust (ILIT) to cover projected estate tax upon the second death.

Tax Savings: Over $4.2M in potential federal estate tax savings. Total KDA fee: $78,000. ROI: 53x on year-one engagement, not including future state-level tax risk coverage. The Chens’ heirs now have flexibility even if a California estate tax enacts in 2026 or later.

FAQ: California Estate Tax Rate and Advanced Strategies

Will California ever pass a state estate tax?

It’s possible—legislation is proposed nearly every session. Families with $10M+ in real estate or business assets should prep advanced plans preemptively.

Should I change residency to Florida, Texas, or Nevada?

Relocation can work, but the IRS and FTB aggressively pursue “sham residency” claims, especially after the $13M exemption sunset. For legitimate moves, relocate entire lifestyle—not just a post office box.

Does gifting real estate or a business trigger taxation?

Gift tax doesn’t apply to unlimited gifts to spouses; annual gifts to others are excluded up to $18,000 per person (2025). For larger gifts, you must file a gift tax return (Form 709), but no tax due until lifetime exemption is used.

What’s a dynasty trust and do I need one?

Dynasty trusts permit wealth transfers to grandchildren/great-grandchildren, bypassing multiple estate tax events. Crucial for families with legacy or philanthropic ambitions. Many plans miss this layer.

Notable IRS & Compliance References

• IRS: Federal Estate Tax
• IRS: Gift Tax & Annual Exclusion
• IRS: Discounted Family Transfers
• IRS: Estate & Gift Tax Audits

For in-depth tax- and trust-layered strategies specific to California, see our complete estate and legacy tax guide.

What Should High-Net-Worth Californians Do in 2025?

Update your plan. Run numbers with California and federal overlays. Don’t let illusions of “no estate tax” delay your proactive strategy, because as soon as the law changes it’s too late to fix. Explore premium estate tax strategy options now, not after the exemption sunset.

This information is current as of 8/24/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.

Book Your Estate Tax Immunity Session

Is your family’s wealth vulnerable to a sudden California or federal estate tax hit? Our advanced planners routinely uncover $400K-$4M in opportunities other firms miss. Book your custom estate tax risk analysis and unlock big-tier legacy protection. Click here to secure your strategy session now.