Why 2025 Will Be a Make-or-Break Year for California Estate Tax: The Strategic Playbook for High-Net-Worth Individuals
Most California millionaires assume they’re safe from state estate taxes because California hasn’t collected one for over a decade. That’s changing. As lawmakers target new sources of revenue in light of budget shortfalls, the risk of a sudden, retroactive estate tax or a redefined exemption limit is real for 2025. If your net worth is north of $10 million, ignoring these headlines could cost your heirs millions—possibly as soon as next year.
This information is current as of 8/17/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.
Fast Answer: Where California Estate Tax Stands for 2025
The estate tax rate California currently imposes is zero—but bills have been proposed to enact a new state estate tax with rates up to 16% and potential exemptions as low as $3.5 million. Congress is also eyeing federal estate tax tweaks. No high-net-worth Californian should count on the status quo lasting through 2025.
- If state-level action occurs, California could align with federal estate tax rates (up to 40%) or set a lower initial exemption, hitting estates as small as $3.5M.
- Federal exemption drops from over $13M per individual in 2025 to roughly $6 million in 2026 unless Congress intervenes.
Bottom line: Every $1 million over the exemption could face a $160,000+ tax in the event California law changes.
Federal vs. California Estate Tax: What’s Actually Proposed?
It’s easy to dismiss California estate tax rumors as just that—rumors. Here’s the reality: multiple bills have been introduced in Sacramento since 2021 to reinstate a state-level estate tax. The most recent would:
- Apply to estates valued at $3.5 million (single) or $7 million (married couple)
- Tax rates start at 0.5% and scale up to 16% for amounts above the exemption
- Mirror some elements of the federal estate tax, but create a new state revenue stream
If passed, this would sit on top of your federal estate tax liability.
- See IRS guidance on federal estate tax
- Read our comprehensive estate and legacy tax planning guide for California
The Real-World Risk: A $10M Estate Could Face a $1M Surprise
Let’s use a real California family’s scenario. The Perez family holds $10 million in real estate, brokerage accounts, and a business. In 2024, with current federal law, they’d owe $0 to California and $0 to the IRS (if structured for spouse portability). But:
- In 2026, the federal exemption drops to about $6 million/person. The Perez estate could owe:
- Federal tax on $4M: up to $1.6 million
- If California adds a state estate tax with a $3.5M exemption and 16% top rate:
- State tax on $6.5M: up to $1,040,000
- Total potential tax: $2.64 million—or over 25% of the estate.
This is why the estate tax rate California sets, or Congress changes, is a multi-million-dollar issue for families above $6-8 million net worth threshold.
Strategic Defense: Lock in Trust Structures Before Exemptions Drop
If your estate is in the danger zone ($5M–$20M), the single most powerful move for 2025 is strategic trust structuring. The transition period—before exemption sunsets or California law changes—is when you can move assets with maximum efficiency.
- Irrevocable Trusts: Move assets out of your taxable estate so appreciation after transfer is never taxed.
- Spousal Lifetime Access Trust (SLAT): “Loan” exemption to spouse, preserving access to funds while locking in current federal exemption (over $13 million/exemption in 2025).
- Dynasty Trusts: Make gifts to grandchildren, locking in today’s high exemption for generations.
- Use your lifetime gift exemption before it drops in 2026 with a discounted business or property valuation—legally compressing large fortunes for transfer at lower tax cost.
Pro Tip: Families acting in 2025 can transfer up to $13.61 million per person federally. Wait until 2026, and it drops to $6M–$7M—potentially exposing millions more to both federal and California estate taxes.
To further refine your strategy or execute advanced moves, consider our premium estate tax planning services for high-net-worth families. Our team delivers hands-on implementation—not just generic advice.
The “Frozen” Discount: Leverage 2025 for Asset Compression
Asset values set in 2025 can be “frozen” for estate tax purposes—this is the key to advanced planning. For example, a business worth $12M could be appraised using a qualified discount at $9M, then transferred to trusts at today’s higher exemption. If its value jumps to $17M by 2030, only $9M is ever counted against your estate tax calculation—essentially “locking out” $8M from taxation forever.
- Discounted values are scrutinized by the IRS (see IRS guidance), so use only credentialed firms
- Sync trust and discount valuations—failure to coordinate may result in zero savings
Red Flag Alert: Most advisory firms suggest “wait-and-see.” By then, law will have changed and windows will close. The biggest savings come to families who act before the paperwork is urgent.
KDA Case Study: HNW Family Avoids $3.2 Million in State Tax Exposure—And Builds Legacy
The Tan Family, residents of the Bay Area, held $18M in real estate and $7M in various marketable securities. With no California estate tax in effect, they—like most families—were complacent, relying solely on traditional revocable trusts. When talk of a state estate tax renewal gained traction, their CPA suggested a review. KDA stepped in to:
- Establish an Irrevocable Life Insurance Trust (ILIT) to remove $5.75M from their taxable estate
- Discount and transfer minority share of real estate (valued at $6.9M) into a dynasty trust using professional business valuation—with a 34% legal discount, lowering reported value by over $2.3M
- Advise large charitable remainder trust gifts, shrinking exposure by another $3M
In all, their heirs now face $0 risk from a possible 2025 California estate tax. KDA’s fees were $27,000, and the ROI is measured in permanent, multi-generational tax avoidance—over $3.2M for one family.
Why Most Millionaires Wait Too Long (And Why CPAs Get Burned)
The most common (and costly) mistake? Treating estate tax planning as an “add-on” to annual income tax work, waiting until Congress or Sacramento passes the next law, or believing that “it’ll never happen here.” Even accounting pros get this wrong: simply holding assets in a revocable living trust does not protect assets from estate tax. That requires shifting control and legal ownership—sometimes years in advance.
Myth-bust: “California has no estate tax.” True today, but ballot measures and bills are pending. Just because the FTB hasn’t collected estate tax recently doesn’t mean new filings couldn’t be retroactive.
Five-Point 2025 Estate Tax Survival Checklist
- Review all personal and family asset titling; ensure full step-up at death (per IRS Publication 551).
- Consult advisors about making a large 2025 gift to children or irrevocable trusts—if estate exceeds $7M, this is urgent.
- Have all real estate, family business, and marketable securities valued by a qualified appraiser to support legal discounts.
- Consider family limited partnerships or LLCs for asset compression and legal multi-generational transfers.
- Draft or update advanced directives and durable powers of attorney to coincide with new trust strategies.
Looking for a hands-on team? Explore our bespoke estate tax planning options to ensure your wealth is shielded, regardless of what Sacramento or Congress throws at you.
FAQ: What High-Net-Worth Californians Ask Us Most
Will California definitely implement a state estate tax in 2025?
There’s no guarantee, but growing budget pressure and multiple legislative proposals make it much more likely—especially targeting estates above $3.5 million. If you act now, you’ll preserve flexibility regardless of what happens.
What’s the best way to “lock in” the higher exemption if my estate is over $10M?
Use irrevocable trust strategies (SLATs, dynasty trusts, ILITs) before 12/31/2025. Making transfers at 2025 values means any appreciation is “locked out” of future estate taxes. See IRS general estate tax guidance for federal implications.
Does a Living Trust protect against estate tax?
No. A revocable living trust only avoids probate but does not shield assets from state or federal estate tax. True estate protection comes from shifting assets out of your name within IRS-compliant trusts and using current exemptions and discounts.
Will a Life Insurance Payout Be Taxed?
Not directly by the IRS, but if proceeds are paid to your estate, they will be included in the taxable estate value. Shelter them with an ILIT to keep them outside both the IRS and California’s reach, should a state tax return.
Mic Drop: If You’re Reading This in 2025 and Coasting on the Old Rules, You’re the IRS’s Ideal Client
The IRS and California Franchise Tax Board aren’t hiding new taxes—they’re counting on wealthy families being slow to react. The window to take action on your estate is closing. Once new laws take effect (or, worse, retroactively), options disappear. Move now, not after the headlines.
If you have more than $5 million in total assets and depend on dated trust documents to shield your estate, you’re likely at risk. Book a personalized consultation with the KDA estate team—get a side-by-side evaluation of your current documents and concrete strategies to protect your legacy. Click here to secure your confidential session today.
