Why 2025’s Estate Tax Law Changes Demand a New California Strategy (Even if You Think You’re Safe)

Most affluent Californians think estate tax and SALT deductions are a done deal—until the IRS or FTB crushes their assumptions with new rules, missed compliance, or an unexpected bill. The 2025 One Big Beautiful Bill Act (OBBBA) fundamentally changed the landscape for high net worth individuals, real estate investors, LLC owners, and S Corps. If you don’t recalibrate your approach right now, you’re gambling with generational wealth and annual tax bills alike. Here’s what you must know before December 31, 2025.

This information is current as of 8/17/2025. Tax laws change frequently. Verify updates with the IRS or FTB if reading this later.

Quick Answer: 2025’s Estate and Deduction Changes in Plain English

The OBBBA raised the SALT deduction cap to $40,000 for individuals under $500,000 AGI and introduced a new itemized deduction limitation, likely impacting many trusts and estates. For businesses, stricter IRS compliance and documentation are now required to withstand audit scrutiny. Bookkeeping discipline, real-time planning, and California-specific compliance are the dividing line between building legacy wealth or bleeding preventable taxes.

The 2025 estate tax law changes California create a window of opportunity but also a trap. With the federal exemption temporarily at $15M per individual, many California families appear safe—yet state-level conformity and the scheduled federal sunset could shrink this to $5M by 2026. A Silicon Valley couple with $20M in real estate could face an $8M taxable estate overnight, equating to more than $3M in federal tax liability. Acting during high-exemption years is critical.

The $40K SALT Deduction—And Its Hidden Trap

After years of the $10,000 state and local tax (SALT) deduction cap, OBBBA now allows up to $40,000—but only for taxpayers with AGI under $500,000. If you’re in the Bay Area or SoCal, think carefully: cross that AGI cliff, even by one dollar, and you revert to the old $10K cap. Many business owners, professionals, and real estate investors will hit this threshold—often unwittingly—due to capital gains, one-time bonuses, or K-1 distributions.

Example: A Santa Clara S Corp owner reporting $470,000 AGI can deduct $35,000 of state/local tax, reducing federal tax liability by about $13,000. If business income jumps to $510,000, they lose $25,000 in deductions and owe roughly $9,200 more in federal tax at top rates. Always monitor income sources—including 1099 consulting, rental wins, or portfolio rebalancing.

Will the IRS Track This Aggressively in 2025?

Absolutely. The IRS technology overhaul means greater visibility into state and local tax payments, cross-checks with W-2/1099, and real estate documents. Your AGI isn’t just a line on your tax return—it’s the audit trigger for SALT deduction eligibility and other key breaks. See IRS guidance on Schedule A for more detail.

Estate and Gift Planning: The Exemption May Not Last

The OBBBA’s estate and gift tax exemption is generous for 2025—but that could change fast. Congress set the exemption at $15 million per individual for now, but politicians have rolled this back repeatedly in past tax cycles. If you’re waiting for “permanent” clarity, you’re gambling the next ten years’ inheritance on D.C. gridlock and last-minute deals.

Under the 2025 estate tax law changes California, advanced planning tools like GRATs, SLATs, and irrevocable trusts become essential. California doesn’t impose its own estate tax, but once the federal exemption resets, Bay Area and SoCal property owners will feel the hit hardest due to high asset values. Locking in valuation discounts under IRS §2704 and transferring LLC interests now can reduce taxable estates by 20–40% before exemptions shrink.

Scenario: A Bay Area family with two homes, investments, and three LLCs holds $14.2 million in total assets. Structured correctly, they’re fully protected from federal estate tax. If the rules sunset back to $5 million in three years, $7 million could become taxable overnight—an extra $2.8 million bill for heirs at a 40% rate. Protect legacy by acting opportunistically during high exemption years: fund irrevocable trusts, lock in gifts, and coordinate with CPA and legal teams now—not later.

What If You’re Under the Exemption?

Don’t get complacent. The IRS regularly audits valuation discounts, aggressive gifting, and trust “step-up” logic. One poorly-done transfer can still lead to six-figure liability with interest and penalties. See IRS guidance on estate and gift taxes

How New Itemized Deduction Limits Affect Trusts and Estates

Pundits missed this: the OBBBA replaced Pease limitations with new itemized deduction restrictions that will likely apply to trusts and estates as well. The catch? Trusts hit the top federal bracket at only about $14,500 in income. A $30K trust, previously able to deduct administration fees, now faces a haircut—meaning higher distributions or phantom tax for heirs.

Example: A trust distributing $50,000 in rental income used to deduct $20,000 in expenses, dropping its federal bill by $7,400. Under new limits, only $10,000 expenses are allowed—leaving $3,700 extra tax liability to be covered, either by the trust or by beneficiaries facing 37% rates on pass-through income. Trust documents and fiduciary reporting must be reviewed and updated every year from now on.

Does This Make Charitable Gifting More Valuable?

Yes, but only if donations clear a new “charitable floor.” In 2025, you can only deduct contributions above a percentage of AGI (think: medical deduction rules applied to charity). Smart donors time large gifts to trigger the itemized deduction, bunch into strategic years, or leverage donor-advised funds for schedule flexibility.

Bookkeeping—The Make-or-Break Catalyst in 2025

With OBBBA and IRS overhauls, what was good enough bookkeeping last year is subpar now. If your documentation doesn’t map directly to deduction claims, expect a pushback—or worse, penalties—during audit. Every deduction (SALT, charitable, advisory fees, business expenses) must be backed by meticulous, contemporaneous records. KDA strategy clients use encrypted platforms, scanned receipts, cloud-based ledgers, and link all tax categories directly to entity bank accounts.

For a breakdown of best-in-class compliance for S Corp and LLC owners, see our California Business Owners’ Bookkeeping Guide.

How Often Should HNW Families and Business Owners Update Records?

Quarterly, at minimum. After major liquidity events (asset sales, refinancing, new entity creation), records and tax strategy must be synced again. Annual review is no longer enough. The IRS and California FTB have invested in pattern-matching AI—your data will be compared across all filings and forms.

Why Most Business Owners and Investors Miss These Traps

The biggest mistake? Assuming that a “best year ever” won’t come with tax surprises the following April. We see this constantly with KDA clients: entrepreneurs who ace business growth but underplan on entity structuring, trust setups, or AGI cliff avoidance until it’s almost too late. One overlooked deduction, one incorrect trust distribution, or one unchecked income jump can erase multi-year savings in a single IRS review.

Myth: “We’ll just fix it next year.” False. The IRS and FTB only honor claims supported by real-time records—no guessing, no post hoc cleanups. Don’t wait for an IRS letter or FTB notice to start the kind of disciplined tax planning that preempts these traps.

Pro Tip: With the post-OBBBA landscape, schedule a strategy session before your year-end. AGI strategy and trust reviews can’t be retroactive once the calendar flips.

KDA Case Study: Real Estate Investor Shields $2.9M Legacy

Persona: Multi-property real estate investor, married, age 58. Portfolio: 9 rental properties in CA/WA, 1 commercial building, S Corp for property management. Estimated assets: $7.8M.

The real risk in the 2025 estate tax law changes California is timing. Families who assume they can “wait and see” will likely miss the exemption window and lock themselves into millions in preventable tax. A $12M Orange County estate can be structured tax-free today, but if exemptions fall in 2026, nearly $7M becomes taxable at 40%—that’s $2.8M handed to the IRS. Coordinated planning now protects generational wealth later.

Problem: Client planned to retire in five years, worried about shifting estate exemption law (rumored 2026 sunset to $5M) and exposure to SALT limits (annual income fluctuates from $330K–$540K). In 2024, had older trust docs and recorded minimal charitable giving.

KDA’s Response: Mapped all real estate, K-1, and business income against the new OBBBA cliffs. Moved discountable assets to an irrevocable trust in 2025, updated estate documents, and executed two $38,000 charitable “bundled” gifts to clear the deduction floor. Upgraded S Corp/LLC recordkeeping to link every expense, payment, and advisory fee to cloud-based ledgers with quarterly reviews and annual reconciliation. Rebalanced income in Q4, keeping AGI under the $500K SALT threshold by advancing management bonuses and harvesting a real estate loss on one underperforming property.

Result: Reduced 2025 federal and CA tax liability by $79,100. Avoided “AGI cliff” penalty, protected entire $7.8M portfolio under new estate guidance, and achieved 5.2x ROI on KDA’s $15,000 fee. Zero IRS or FTB follow-up since updated compliance protocols. Legacy wealth remains intact for next generation, with every deduction and transfer legally documented for future IRS review.

Major Red Flags: Mistakes That Trigger Audits and Penalties

1. Commingling business and personal income through trust or S Corp/LLC accounts—triggers IRS and FTB scrutiny, retroactive penalties, interest, and even trust audits. Solution: set up strict entity boundaries, unique EINs, and bank accounts.

2. Unsubstantiated charitable deductions or last-minute “bundled” gifts without acknowledged receipts or documentation. If you plan to donate $10,000+ annually to clear the deduction floor, ensure every step is IRS-compliant. See IRS charitable contribution documentation requirements.

3. Failure to update trust documents for new deduction limitations or AGI cliffs. An irrevocable trust founded in 2015 may fail IRS tests and expose beneficiaries to pass-through taxes at top rates.

What’s the Fix?

• Quarterly bookkeeping review (use a CPA familiar with the OBBBA/2025 rules)
• Immediate trust and estate document review—do not rely on outdated “permanent” exemptions
• Charitable planning and AGI timing strategies with evidence for every deduction

If you suspect your trust setup or deduction tracking can’t withstand a letter from the IRS, now is the time to run a full compliance stress test—not later.

FAQs: The IRS and FTB Landscape in 2025

What is the itemized deduction “floor” for charitable contributions in 2025?

The new “charitable floor” means only the amount of giving above a set percentage of AGI (varies by income) is deductible. Bunch gifts and secure official receipts to clear the threshold.

How do I avoid the AGI cliff with variable business or investment income?

Harvest losses, prepay deductible expenses, bonus acceleration, and year-end income planning with your CPA are essential to stay under $500K AGI for the SALT break.

Can my S Corp or LLC still write off SALT at the entity level in California?

Yes, California’s PTE elective tax regime remains for 2025, but only pays if you have proper entity planning and opt in by the deadline annually. More from FTB here.

Book Your 2025 Strategy Session and Lock in Protection

The risk of waiting another season is real. New law nuances, AGI cliffs, charitable deduction traps, and legacy protection measures can’t be fixed with a simple year-end patch. Book your dedicated session with KDA and leave with a tailored plan—and full paper trail—for the IRS and FTB in 2025. Click here to book your 2025 Estate and Deduction Strategy Session now.