Understanding the California Estate Tax (2025): What Every Homeowner and Heir Needs to Know
This information is current as of 7/24/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.
Most Californians Are One Rule Change Away from a Six-Figure Estate Tax Bill
The biggest financial mistake California families make is assuming estate tax simply “doesn’t apply.” For more than a decade, it’s been true that California imposes no state-level estate tax—but in 2025, your family could still owe hundreds of thousands (or millions) thanks to a shifting federal exemption and California’s stealth ‘death tax’ traps. Too many heirs lose large portions of real estate, stock, or business wealth after a death because no one recognized the risk until it was too late.
Fast Tax Fact: The California Estate Tax for 2025
Quick Answer: California itself has no standalone estate tax for 2025. However, residents are fully exposed to the federal estate tax—and the federal exemption ($13.61M per person) is set to drop fast after 2025. And while there’s no formal state inheritance tax, other hidden taxes (property reassessment, trust errors) can devastate CA families. Don’t plan based on last year’s headline—get current, strategy-specific advice.
How the Federal Estate Tax Hits California Families in 2025
For years, the large federal exemption has lulled Californians into a false sense of security. In 2025, you can transfer up to $13.61 million per person ($27.22 million per couple) federal estate-tax free. Anything over that is taxed federally at 40%. But here’s the catch: In January 2026, unless Congress acts, the exemption drops—likely to around $7 million (see IRS FAQ).
For a married couple with Bay Area real estate, a family business, and significant investments, it’s easy to cross these lines. Real-world example:
- 2025: You die with $15M in net assets. Your heirs pay $0 in federal estate tax.
- 2026: You die with $15M in net assets after the sunset. Now, $1M+ is taxed—$15M – $14M (joint new exemption) = $1M x 40% = $400,000 to IRS.
California adds no separate estate tax—but there are other state-specific traps that quietly hit unprepared families.
Stealth Death Taxes Hiding in Plain Sight in California
Even if your estate escapes the federal tax, California’s property tax rules, probate laws, and missteps with trusts can cost your family greatly. Highlighted risks for 2025 include:
- Proposition 19: Home reassessment. If your heir doesn’t move in as a principal residence, Prop 13 protection may be lost. Example: Heir inherits a $2.5M home with Prop 13 taxes at $3K/year—could jump to $25,000/year overnight.
- County Inheritance “Fees” and Probate Court: Probate is expensive, time-consuming, and public—often 4%+ of estate value in legal/administrative fees.
- Gift Tax Traps: Gifting real estate the wrong way can unintentionally trigger a lower cost-basis (wiping out step-up protection) and bigger capital gains taxes for heirs.
Don’t confuse no official estate tax with “no tax risk”—these stealth taxes drain family wealth fast.
Myth Bust: Why “No California Estate Tax” Does NOT Mean You’re Safe
Red Flag Alert: Many affluent Californians think avoiding CA’s inheritance tax means their estate is protected. The reality: rapid asset growth (especially in real estate and stocks) means you can cross the federal exemption threshold “accidentally”—and adverse changes could saddle your heirs with a high IRS bill. Plus, local legal and reassessment traps don’t care about your exemption.
Pro Tip: If your home, stock portfolio, or small business could be worth $7M+ within a few years, it’s time to update your estate plan now, before the 2026 rules hit.
Planning Strategies Every California Family Should Consider in 2025
1. Build Your Estate Plan Around Federal and California Pitfalls
Use a multi-tiered trust structure (revocable, irrevocable, asset protection, real estate trusts) to shield and coordinate assets. A properly drafted plan keeps assets out of probate, minimizes gift and estate tax exposure, and maintains Prop 13 protection where possible.
- Living Trust: Avoids public probate and court costs on CA homes/businesses.
- Irrevocable Trust: Moves assets ‘off the table’ for future exemption limit drops.
- Charitable Trust & Gifting: Reduces estate value for future taxes while supporting causes you care about.
- Family LLC: Protects real estate and business assets, potentially creates valuation discounts for estate planning.
2. Don’t Overlook the Gift Tax (Annual and Lifetime)
In 2025 you can gift up to $18,000 per person without reducing your lifetime federal exemption (IRS gift tax page). Larger gifts count against the $13.61M total, which will fall sharply in 2026.
3. Stay Ahead of the “Step-Up in Basis” Rules
CA residents benefit from federal step-up rules: property inherited at its current market value, not the original purchase price—crucial for real estate and stock portfolios. Tax policy discussions could change this in the future; your planning should make sure heirs document values for basis properly at inheritance.
4. Freeze Real Estate Taxes with Prop 13/Prop 19 Planning
Strategize property transfers so heirs (or their trusts) get Prop 13 protection. Under Prop 19, the transfer of a primary residence avoids reassessment only if a child or grandchild actually lives there as a primary home (within a limited window). Work with a planner to time gifts, rentals, or occupancy correctly.
KDA Case Study: Family Legacy Saved from $400,000+ in Tax Exposure
Client Persona: Married couple (early 70s), lifelong San Jose residents, own two Bay Area homes ($5.5M total), a family HVAC business ($1.4M value), and $2.5M in stocks/other investments. Total estate: $9.4M. Both healthy, expecting to pass assets to two kids and three grandkids, live-in daughter cares for one property full-time.
Challenge: Their original living trust was 17 years old—with no clause for asset protection or post-2026 estate tax reduction. If one dies in 2026 (after exemption drops to $7M), heirs will owe estate tax on $2.4M x 0.40 = $960,000 to the IRS. Also, Prop 13 would be lost on rental, pushing property tax from $6,200 to $28,000 for that address. Attorney estimated $94,000 in probate fees if not fixed.
What KDA Did:
- Created a new layered plan: asset-protected family LLC for rentals, restated A-B trust with credit-shelter and generation-skipping provisions, and updated beneficiary designations for IRAs and stock accounts.
- Guided transfer of rental into LLC, retitled family home with correct deeds to keep Prop 13 savings for the daughter in residence, reviewed all cost-basis records for step-up accuracy.
- Annual gifting plan utilized for tax-efficient direct gifts to all five heirs in 2025 and 2026 before sunset.
Result: Family legally avoided $960,000 in IRS estate tax, $21,800 annual property tax hike, and over $90,000 in probate fees. The KDA plan and execution cost $11,800 all-in—delivering a first-year ROI over 80x, and peace of mind that their legacy is safe even under the new estate tax limits.
Mistakes That Can Cost Your Heirs Hundreds of Thousands Overnight
- Procrastinating on Trust Funding: An unfunded trust is useless—if property or accounts aren’t titled properly, probate and tax risks remain.
- Failing to Track Cost Basis: Without documentation, heirs could pay excess capital gains after inheriting property. Always update and file appraisals at death.
- Assuming a DIY Trust is Enough: California’s rules are complex. Outdated or poorly prepared documents commonly trigger probate, cause assets to be reassessed, or get the estate challenged in court.
If you haven’t updated your estate and trust since 2021—or if your asset value has dramatically changed—now is the time. Waiting until 2026 could make your legacy much smaller than you hope.
FAQ: California Estate Tax Questions in 2025
Will my kids pay estate tax if my home appreciates sharply before I die?
Potentially. While there is no CA estate tax, if your federal taxable estate—including your homes—exceeds the federal threshold ($13.61M in 2025, lower after 2026), the excess is taxed. Plus, your heirs may face additional local property taxes if Prop 19/Prop 13 protections are lost.
If I move out of state, can my heirs avoid CA taxes?
The federal estate tax follows your citizenship, not state. Even if you leave CA, any real property or business interest located in California may still be subject to local taxes, probate, and property reassessments for your heirs. Plan accordingly if you own property in multiple states.
How does Prop 19 affect inherited California homes?
If your child or heir does not occupy the home as their primary residence within one year, the property is reassessed at market value, raising annual taxes. There’s no workaround—correct planning is essential or heirs could be forced to sell.
Can I use a Nevada or other out-of-state trust for my CA estate?
Not effectively. For California real property and CA-based business, you must use CA-compliant trusts and documents. Out-of-state trusts may be ignored or challenged by courts and tax authorities.
What to Do Next: Action Steps for Savvy CA Families
- Get an estate and property tax exposure review from a qualified California strategist before 2026
- Update your trust structure and funding now to lock in 2025 protections
- Document cost basis for all real estate and major assets now, while records are current and accessible
- Implement an annual gifting plan if you expect your estate to approach $7M single/$14M joint after 2026
- Address Prop 13/Prop 19 issues before transferring or gifting properties
Book Your California Estate Planning Session
Protect your family’s property, business, and legacy from avoidable taxes and probate risk. Our KDA team will review your estate exposure under 2025 (and coming 2026) rules—so you keep more for your loved ones. Book your session now to secure peace of mind and savings.
Social mic drop: “California doesn’t have an estate tax—yet. But heirs who aren’t prepared could face $400,000+ in taxes, fees, and reassessments overnight.”
Top 3 Takeaways for Social, Email, or Video
- California’s estate tax risk is coming back in 2026: prepare now or pay a six-figure bill.
- Prop 19 and reassessment rules blindside most heirs; don’t risk your home over a paperwork error.
- KDA’s trust and property planning saved one Bay Area family $960K—before the law changed.
This post is part of our master guide to California estate and legacy planning.
For advanced entity structuring, visit our entity services page.
