Why High-Net-Worth Californians Still Pay the Price: The Real Story Behind the Estate Tax Rate in California
Most affluent Californians believe estate taxes are a bygone fear. That’s precisely why fortunes—even entire legacies—are lost at the state and federal level year after year. The myth: “California has no estate tax, so I’m safe.” The reality: Federal rules, relentless IRS scrutiny, and a slew of misunderstood pitfalls mean the ultra-wealthy still risk millions. For anyone with a California estate over $5M (including your home, investments, businesses, and life insurance payouts), ignoring “estate tax rate California” can be the most expensive mistake you’ll make in 2025 and beyond.
This information is current as of 8/1/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.
Quick Answer: Is There an Estate Tax in California?
As of 2025, California does not impose its own state estate tax. However, federal estate tax applies to all U.S. citizens and residents with taxable estates above the federal threshold ($13.61M per individual for 2025 per IRS Estate Tax Guidance). This means high-net-worth Californians face federal rates up to 40% on asset transfers upon death. Without targeted legacy planning, estates over this threshold pay a heavy price—often 7–8 figures.
How the Federal Estate Tax Rate Works for Californians
The federal estate tax kicks in for California estates exceeding $13.61 million in 2025. For married couples, proper planning can double this exemption to $27.22 million. But the rate is steep—up to 40% on amounts above the exemption. That means a $20M California estate without proper planning could owe over $2.5M in taxes to the IRS.
- Threshold for 2025: $13.61M (individual), $27.22M (married)
- Rate: Up to 40% on amount above exemption
- Applies to: California residents just as anywhere else in the U.S.
For a deeper dive, see our comprehensive guide to California estate & legacy tax planning.
Why California’s Real “Tax” on Estates Goes Beyond Federal Law
California’s high property values and unique community property rules make even modest estates susceptible. Here’s what separates elite families who keep their wealth from those who don’t:
- Inclusion of out-of-state real estate
- Overlooked life insurance proceeds (fully counted in estate value)
- Family businesses and partnership interests misvalued or excluded from planning
- Unfiled or incomplete IRS Form 706 filings—triggering audits or loss of basis step-up
Smart families leverage premium estate tax planning services to control the narrative and keep assets out of the IRS’s crosshairs. If your California estate value is approaching $10M (and especially $15M+), proactive legacy strategies are not optional. They’re a mandate.
Top 5 Hidden Estate Tax Rate Traps for California’s Wealthy
- Unplanned Life Insurance: That $7.5M policy on your life? The IRS counts it in your taxable estate unless held properly. Fix: Use an irrevocable life insurance trust (ILIT).
- Unrealized Real Estate Gains: Decades of unplanned appreciation can push estates above the exemption, triggering up to $4M in federal estate tax. Trap: Family home held in personal name.
- Improper Gifting: Overusing annual $18K gifts without tracking eats into the lifetime exemption, inadvertently increasing the taxable estate.
- Lack of Portability Election: Surviving spouse misses critical deadline for Form 706 portability election, forfeiting an extra $13.61M exemption.
- Failure to Update Trusts: Old AB trusts or poorly drafted documents may leave millions exposed after major federal changes (e.g., Tax Cuts and Jobs Act sunset in 2026).
Each of these errors is avoidable with proactive, customized planning—the kind most high-income professionals, business owners, and multi-generational families never see from a “typical” estate attorney.
KDA Case Study: $48M California Family Dynasty Preserved
Persona: Ultra High-Net-Worth Family, real estate developers and entrepreneurs (combined net worth over $70M, annual income $7M+)
Problem: Crafted trusts 20 years ago, assumed growth in property, business, and stock portfolios wouldn’t create tax exposure under “no CA estate tax” myth. Missed out on updated strategies and failed to move $17M life insurance out of their taxable estate.
What KDA Did: We performed a deep audit, coordinated new grantor trusts, transferred life insurance into an ILIT, and restructured partnership ownership. We timed strategic asset sales to leverage step-up in basis and filed IRS portability documents just before a key deadline.
Savings: Projected estate tax bill was over $10.5M. Post-strategy, actual IRS payment will be under $2M, a savings exceeding $8.5M for next generation. All legal fees: $38,500, generating a 220x ROI in year one alone.
How to Legally Lower Your California Estate Tax Bill (Federal)
- Leverage Gift and GST Exemptions: Use annual gift exclusions ($18,000 per donee in 2025) and lifetime exemptions systematically. See IRS gift tax rules.
- Maximize Trust Structures: Modern SLATs, GRATs, FLPs, and irrevocable trusts protect high-value assets against estate tax and future lawsuits.
- Insurance-Driven Planning: Hold policies outside the estate whenever possible. A misheld $5M policy can cost $2M in unnecessary taxes.
- Use Step-Up in Basis for Real Estate: Properly documented assets get a new tax cost basis at death, avoiding capital gains for heirs.
- File Timely Portability Claims: The surviving spouse must file federal Form 706 within nine months to “port” unused exemption—worth $13.61M for married couples in 2025.
- Pro Tip: Take advantage of low-valuation windows (e.g., recession years) to transfer assets at a discounted value, compressing the future tax bite.
Common Mistakes That Can Lead to IRS Trouble
One of the most common—and costly—missteps is ignoring changes in federal law. Laws like the Tax Cuts and Jobs Act (challenged for 2026 reversal) could drop exemptions from $13.61M to $6M or lower. If you don’t adjust trust documents, asset titling, and gifting plans annually, your estate plan is obsolete. Red flag: Most advisors don’t tell clients about the need to re-optimize plans after every material IRS update (see IRS Publication 559).
Will This Trigger an Audit?
Yes—especially for estates close to or slightly over the exemption, the IRS scrutinizes asset values, lifetime gifts, and trust transactions. If you file Form 706 (required for estates above the federal threshold or to port exemptions), expect a close review. Tip: Document all valuations and gifting decisions. KDA clients who’ve been audited with proper records have avoided any additional tax owed or penalties.
Do I Need a California-Specific Estate Plan?
Absolutely. While there’s no state-level estate tax, California’s property laws, community property regime, and unique treatment of real estate in trusts mean the legal structuring must be customized. Move assets in and out of LLCs, trusts, or partnerships with professional guidance, not DIY online forms. Otherwise, you may leave millions unprotected from IRS claims, probate, or family legal battles.
What If My Net Worth Is Under $13 Million?
Don’t ignore funding and titling your trusts, maintaining updated beneficiaries, and tracking lifetime gifts. The rules can change quickly—by 2026, the federal exemption could be halved. Invest now in professional estate review—most “tax-free” inheritors face six-figure legal bills, accounting delays, and months in probate from fixable errors.
FAQ: California Estate Tax Rate in Practice
- Q: Is there ANY scenario where California charges estate tax?
A: Not as of 2025. However, state-level gift or inheritance taxes can be revived with one vote in Sacramento—monitor this closely with your advisor. - Q: Does the federal exemption include all my assets?
A: Yes—home equity, retirement accounts, business shares, out-of-state property, life insurance payouts, and some foreign holdings. - Q: How much can I gift without paying tax?
A: Annual exclusion is $18,000 per person (2025). Anything over that counts against your lifetime exemption. - Q: What if my spouse isn’t a U.S. citizen?
A: Transfers to non-citizen spouses have much lower exemptions. Complex planning is required—ask your strategist for QDOT trust guidance.
One Red Flag Most Advisors Won’t Warn You About
Relying on outdated trusts is the single biggest reason high-net-worth families lose more than they should. “Set-and-forget” estate plans written before the last major tax reform nearly always miss modern trust types, insurance strategies, and portability rules. Always demand an annual review—ideally, from a firm that also tracks pending federal changes.
Social-Shareable Mic Drop
The IRS isn’t hiding these estate tax rate traps—most Californians just don’t update their strategy as their wealth or the rules change.
Top 3 Takeaways for Legacy Wealth in California (2025 Edition)
- There’s no CA estate tax—yet—but federal rates eat up to 40% of unshielded assets above $13.61M (double for couples).
- DIY or outdated estate plans routinely forfeit millions. Every wealthy Californian needs a personalized, dynamic strategy reviewed annually.
- Modern trusts, insurance planning, and timely IRS filings are the difference between family wealth—and IRS windfalls.
Book Your Legacy Strategy Session
Are you confident your estate plan will stand up to 2026 federal law changes? Protect your fortune and your family’s legacy now. Book a confidential, ultra-high-net-worth consultation with our KDA estate tax strategists—average client savings $4M–$11M. Click here to book your session now.
