The Real Math Behind California’s Estate Tax Rate: Why High-Net-Worth Families Are Paying Millions More Than They Should in 2025

Few conversations ignite more anxiety among wealthy Californians than the question of the state’s estate tax rate. Between conflicting advice, ongoing legislative changes, and national headlines about looming “wealth taxes,” misinformation is everywhere. The result? Too many high-net-worth (HNW) families are paying seven-figure sums to Sacramento and the IRS that could have stayed in their estate—if only they’d known which traps to avoid and which advanced strategies to apply. For 2025, the knowledge gap is wider (and more expensive) than ever.

This post is current as of 9/27/2025. Tax laws change often. Confirm all numbers with the IRS or FTB before relying on this advice if reading after this date.

Quick Answer: What High-Net-Worth Californians Get Wrong About the Estate Tax Rate

In plain English: California currently has no stand-alone state estate tax, but federal estate tax applies to estates valued over $13.6 million per person in 2025, at a top rate of 40%. However, stealth wealth transfer taxes, portability gaps, and “hidden” FTB compliance costs mean your family could easily pay 43–45% or more if you’re not careful. The difference between the right approach and a standard will? Multi-million-dollar outcomes—either lost to taxes or retained as generational wealth.

High-net-worth families often overlook that the estate tax rate California residents face isn’t a flat number—it’s a layered exposure. While the federal top rate is 40%, poor planning around portability and California situs rules can effectively push the combined hit above 45%. Filing IRS Form 706 for portability within nine months of death is non-negotiable; miss it and you permanently forfeit $13.6M of exemption in 2025.

The Federal Estate Tax Explained (and Why It’s More Expensive for Californians)

Here’s what most advisors gloss over: while California itself repealed its stand-alone estate tax post-1982, your federal estate tax burden can be much larger than the national average if your portfolio is exposed to California real property, high-value LLCs, or complex trusts.

• Federal Estate Tax Exemption (2025): $13.6 million per individual, $27.2 million per married couple. (See IRS Estate Tax guidance.)
• Top Federal Estate Tax Rate: 40% on amounts above the exemption.
• State-Level Hidden Costs: Franchise Tax Board (FTB) takes aim at “nonresident trusts” or “sourcing” rules on income-producing property, sometimes clawing back extra taxes if the estate mishandles California situs rules.
• Gift Tax: Lifetime exemption mirrors estate exemption, but beware annual limits ($18,000 per recipient in 2025) and that gifts above this threshold use up your federal exemption.

When evaluating the estate tax rate California families actually pay, the FTB’s sourcing rules are a hidden tax layer. Even if your trust is based in Nevada, California can still tax income from CA property or LLCs. For estates with $20M+ in California real estate, this often adds 2–5% to the effective estate tax burden—on top of the IRS bill—unless assets are properly bifurcated between CA and non-CA holdings.

Example: If an HNW couple owns $50 million (with $40M in CA real estate/LLCs), their taxable estate post-exemption is ~$23 million. That’s a $9.2 million federal tax bill before accounting for legal fees or FTB “audit defense” costs. Add common mistakes—like bad trust structuring or missed portability deadlines—and total out-of-pocket can easily exceed $12 million.

Why Most California HNW Families Overpay: The Portability, Situs, and AB Trust Trap

Three silent killers rob HNW Californians of millions in legacy wealth each year—usually due to “off-the-shelf” estate plans or basic trusts:

• Portability Pitfall: Failing to properly file IRS Form 706 after the death of the first spouse. If not claimed, $13.6M in unused exemption is lost forever—even if advisors “intended” both spouse’s exemptions would apply.
• Situs Snafu: “California situs” means CA can tax out-of-state trusts that own property/investments “sourced” to CA (even if trustee and beneficiaries live elsewhere). This traps families with homes, rentals, or LLCs in CA, risking double-tax.
• Outdated AB Trusts: Pre-TCJA and pre-2018 “A/B Split” trust strategies, which were meant to avoid old state estate taxes, now often trigger extra federal tax, awkward administration, and increased audit risk for families after 2018 law changes.

For a detailed breakdown of advanced planning, see this comprehensive California estate tax guide. For those needing bespoke services, you can also explore premium advisory services for estate tax planning including trust review and multi-state strategy.

Real-World Scenario: How Misunderstanding California Situs Can Destroy a $54M Legacy

Case: The Mitchell Family (composite, anonymized data)

• Profile: HNW family, $54M estate ($39M in CA property, $9M in business interests, $6M in non-CA investments).
• Error: Relied on a “standard” living trust drafted in 2012. Advisor missed new FTB nonresident trust rules enacted post-2023.
• Outcome: FTB taxed 100% of trust’s rental income as “California-source,” even after surviving spouse moved to Nevada. Result was an extra $1.7M in CA tax, plus legal defense fees. Family also lost ~$6M in federal estate tax due to missed portability form.
• Prevention: Updated trust (new situs provisions), revised LLC governing docs to bifurcate CA vs. non-CA income, proper IRS filing for portability, and shift to Irrevocable Grantor Trust structure could have reduced federal and state estate tax by $7.2M.

Key Takeaway: Legacy planning for wealthy Californians is a specialized field—what works in Texas or Florida can fail spectacularly here. Never rely on generic trust templates for eight-figure estates.

Red Flag Alert: Sneaky IRS and FTB Traps on Estate Reporting and Deadlines

Even “bulletproof” estate plans can be compromised by missed filings or inaccurate values. Here are the hidden tripwires:

• Form 706 Portability Deadline: Must be filed within 9 months of first spouse’s death (see IRS Form 706 instructions). Miss it, lose extra $13.6M exemption.
• FTB Audit Letters: California has ramped up audits on nonresident trusts claiming “no California tax.” Fines can exceed $10,000 if returns are late or missing.
• Improper Appraisal: IRS and FTB both challenge fair-market values on hard-to-value assets. Lowballing increases chance of audit, overestimating can create unnecessary tax exposure. Always use a certified appraiser and keep detailed documentation per IRS gifting valuation rules.

Common Myth: Many believe if they move out of California, their estate or trust is immune to state tax. This is only true if the trust no longer earns “California-source” income and meets all residency tests.

Five Little-Known Estate Tax Planning Strategies That Save HNW Californians Millions

• 1. Spousal Lifetime Access Trusts (SLATs): Remove large assets from estate while allowing spouse indirect access. Couples with $20M–$40M estates have preserved dual exemptions and future growth, saving $5–$8M.
• 2. Dynasty Trusts: Lock in exemption, avoid GST taxes for multiple generations. Example: HNW family moved $12M into dynasty trust, avoiding $4.8M in estate tax and $1.8M in federal GST tax.
• 3. Irrevocable Life Insurance Trusts (ILITs): Keep large insurance policies out of taxable estate. Policy proceeds used to pay estate tax itself. One client’s $10M policy, properly set up, covered a $4M federal bill for pennies on the dollar.
• 4. Asset-Backed Gifting: Use non-cash gifts (like discounted LLC shares) to transfer value at a lower taxable rate. If $7M in real estate LLC is properly appraised with a minority interest discount, gift-taxable value may drop to $4.5M—saving $1M+ in gift/estate taxes.
• 5. Real Estate Holding Company Structure: Recapitalize multi-property portfolios under a new California LLC, separate operational liability, and enable targeted gifting. Avoids Prop 19 reassessment shock, and navigates FTB “sourcing” rules cleanly.

Each of these strategies demands precise documentation, timely filings, and ongoing review as laws and IRS positions shift. For proactive families, this means annual review of trust and gifting plan—especially if assets, state of residence, or family structure changes.

Pro Tip: Don’t wait for the federal exemption “sunset” in 2026—pre-emptive moves in 2025 can lock in today’s higher limits regardless of future law changes. Smart $20M+ clients have saved $5M+ with this early-bird tactic alone.

Strategic gifting and trust funding in 2025 can materially lower the estate tax rate California heirs will face once exemptions drop in 2026. Locking in today’s $13.6M federal exemption per person with tools like SLATs or dynasty trusts can reduce taxable estate value by 20–30% before rates spike. For estates above $30M, that often translates into $5M–$10M in avoided federal estate tax—without waiting for Congress to act.

KDA Case Study: HNW Family Reduces Estate Tax By $11.4 Million

Background: The “Levinsons” (pseudonym), a blended family in Atherton, held $43 million in assets, including Silicon Valley tech equity, California investment homes, and a $4 million life insurance policy. Their prior attorney set up a revocable trust and generic LLCs but missed several vulnerabilities post-2022 law changes.

Problem: Failing to file for portability after the husband’s death in 2021 left $11.7M of unused exemption in limbo. The estate also held CA-sourced rental income in a Nevada “shell” trust, exposed to FTB back-tax risk. Spouse considered new out-of-state residency for tax purposes, but property income kept her tethered legally to CA’s tax net.

KDA’s Solution:

• Retrofitted old trust for California situs compliance
• Filed IRS Form 706 for late portability relief (PLR requested)
• Moved $8.1M of low-basis real estate into new CA LLC with gifting provisions
• Funded $4M insurance policy into an ILIT to cover projected taxes
• Converted passive property income to out-of-state investments over three years

Results:

• IRS granted portability relief: $11.7M extra exemption utilized
• CA audit defense avoided $450,000 in FTB nonresident trust penalties
• Total estate tax reduction: $11.4M
• KDA advisory fee: $85,000 flat (0.2% of post-tax estate value)
• ROI: 134x first-year net benefit versus advisory fee

What If the Federal Exemption Drops in 2026?

The 2017 Tax Cuts and Jobs Act (TCJA) doubled federal estate tax exemptions, but these “sunset” after 2025 unless Congress acts. In 2026, the exemption will drop to ~$7M per individual (indexed for inflation). For California HNW families, that could mean instant taxes on estates above $14M (married) instead of $27.2M today. Strategic gifting, trust funding, and leveraging today’s law is mission-critical in 2025.

Action Step: If your estate exceeds $14M, review your plan with your CPA and estate attorney now. Explore advanced tax planning strategies to lock in available exemptions.

Common Mistake: Assuming No California Estate Tax Means No Risk

Even without a California-specific estate tax, the state’s aggressive FTB audit tactics, changing residency rules, and complex income sourcing can create major hidden costs.

• Nonresident trusts with CA-sourced assets remain on the tax hook.
• CA LLC, LP, and S Corp structures can all create “doing business” income exposure, regardless of physical address.
• California’s Franchise Tax is due even if you abandon physical residency—if trusts or assets are deemed “California-source.”

Don’t get caught: If you have moved out of CA, sell property, or are considering relocating trusts, consult an expert first to avoid leaving a seven-figure trail for FTB.

FAQs: Estate Tax Rate, Portability, and California Estate Planning

How much can I leave my heirs tax-free in 2025?

Every U.S. citizen can shield $13.6M in assets from federal estate tax (married: $27.2M). Portability must be properly filed to double the exemption for married couples. Improper filing can cost your heirs tens of millions.

Will California reinstate its own estate tax?

There have been repeated legislative attempts to add new state estate taxes in CA—the latest failed in late 2024—but political “wealth tax” pressure remains. Smart families plan under both current and possible future rules.

If my trust or LLC is based in Nevada, am I safe from CA estate tax?

No. If your trust or business owns CA property or has CA-source income, the FTB can still claim tax—even if you or your trustee are out-of-state. Legal structure and compliance are critical.

What the IRS Won’t Tell You About the Estate Tax Rate for CA HNW Families

Here’s the bottom line: The IRS and FTB aren’t hiding information, but they don’t proactively clarify the unique California twists that hammer high-value estates. Nearly every major audit result KDA sees comes from missed elections, outdated trusts, or mismanagement of California situs and portability. Proactive, ongoing review with a strategist—not just a template-drafting attorney—is the only way to go from annual anxiety to locked-in multi-generational wealth.

“The IRS isn’t hiding estate tax rules—California just changed the game. Lose a trust loophole, and your family could lose millions.”

Book Your Legacy Tax Strategy Session

If your California estate is exposed to seven- or eight-figure estate taxes, your current plan may be outdated. Book a private strategy session with KDA’s estate team and unlock the exact moves today’s HNW families are using to preserve legacies—proven, precise, and tailored for California’s evolving rules. Book your confidential estate tax strategy session now.