Why Most High-Net-Worth Californians Overestimate ‘California Estate Tax’—And The Federal Reality That Could Cost Your Heirs Millions
When it comes to estate taxes, misinformation is more expensive than nearly any other financial blunder. Many of California’s high-net-worth families are convinced the “California estate tax” will swallow up a sizable chunk of generational wealth. Here’s the truth: California repealed its estate tax in 1982. But misunderstanding the interplay between state rules and the very real, extremely costly federal estate tax still exposes families to multi-million dollar threats every year.
Quick Answer: Is There an Estate Tax in California in 2025?
California does not levy a state estate tax as of 2025. However, large California estates can face seven-figure federal estate tax liability for assets above the federal exemption ($13.61M/person in 2025; married couples, $27.22M), potentially triggering a 40% tax rate on every dollar above the limit. Most families miss this: state law doesn’t shield you from the IRS.
How the ‘California Estate Tax’ Myth Survives—And Why It’s Dangerous
Ask any real estate professional or high-net-worth financial advisor in Los Angeles, San Francisco, or Orange County, and you’ll hear panic about a looming “California estate tax”. That myth persists because of two factors:
- California’s top income tax rate (now 13.3%)—the highest in the nation—creates fear it must also hit estates hard
- Voters have seen bills introduced to reinstate estate/inheritance taxes (none have passed as of 2025)
But at the state level, your assets pass tax-free (apart from property tax reassessment risks via Prop 19 if not protected by proper trust planning). The real monster is the federal estate tax—which applies at a punishing 40% on everything above the federal exemption. For a $40M estate, that’s a potential $5.1M–$10M lost to the IRS unless strategic planning is implemented years in advance.
The Federal Trap: Most Wealthy Californian Estates Still Owe Millions
Federal estate tax is unavoidable for substantial estates, and California’s ultra-high property values push many families above exemption thresholds. Here’s how it works in 2025:
- Exemption (2025): $13.61M per individual; $27.22M for married couples
- Tax Rate: 40% on every dollar above exemption
- California Law: No state estate tax. Inheritance is not subject to income tax at state level, but capital gains can bite if assets are sold post death.
Example: The Lee family owns $38M in Bay Area real estate, investments, and cash. Dad dies in 2025, leaving assets to kids. Federal exclusion: $13.61M. Taxable estate: $24.39M. Potential federal tax: $9,756,000. Simple errors in trust structure (title issues, portability mistakes, or failing to use advanced gifting) often add millions to tax bills.
Strategic Moves To Reduce—or Eliminate—Federal Estate Tax for Californians
The good news? Federal estate tax is optional with proper planning. Key moves:
- Lifetime Gifting: Use 2025’s gift exemption—up to $18,000/year per donee, no limit on number of recipients. “Gift splitting” between spouses can double annual exclusion.
- Irrevocable Trusts: Move appreciating assets out of your estate (IDGTs, SLATs, GRATs, and others)
- Grantor Retained Annuity Trust (GRAT): Transfer future appreciation out of estate with minimal gift tax
- Charitable Lead/Charitable Remainder Trusts: Charitable giving reduces taxable estate, delivers current income tax deduction
- Family Limited Partnerships/LLCs: Discounted asset values for transfer, protection from creditors, income splitting
- Portability: Surviving spouses must file Form 706 to claim deceased spouse’s unused exemption. Miss this deadline? You lose up to $13.61M in additional shield. See IRS Form 706.
Strategic Trusts and Modern Approaches: Beyond Wills
Living Trusts: Protects from probate (costly and slow in California), avoids court supervision. But living trusts by themselves do NOT eliminate federal estate tax.
Irrevocable Life Insurance Trust (ILIT): Moves large life insurance payouts outside taxable estate—shielding up to $10M+ from IRS reach when structured correctly.
Dynasty Trusts: Protect assets from estate tax and creditors for multiple generations (can be especially powerful for tech families/investors anticipating multi-generational wealth transfers).
An expert estate planner can blend these with advanced income-tax minimization strategies (like step-up in basis, QSBS for startups, intra-family loans, and more).
For an in-depth overview of next-level estate tax shields and wealth transfer moves, see our comprehensive California estate & legacy tax planning guide.
Why Wealthy Californians Still Trip Up: 3 Fatal Errors
- Assuming the living trust alone shields them from IRS estate tax. (False—it only avoids probate.)
- Waiting too long: Strategies (gifting, trust setup) only fully work if implemented years before death or transaction
- Not reviewing plans after major law changes: The federal exemption is scheduled to drop to ~$7M in 2026 unless Congress acts, putting many more at risk. IRS estate tax news.
Red Flag Alert: Misusing Portability (the $13.61M Mistake)
Most wealthy couples assume a surviving spouse will automatically get both exemptions ($27.22M combined). Not true: IRS requires the right paperwork. If the Michaelsons lose track of the Form 706 deadline, the surviving spouse may face a $4M+ excess federal tax that could have been prevented by one timely filing.
Pro Tip: Integrate Wealth Transfer with Multi-State Wealth
Own property or business interests outside California? Coordinate with attorneys across states—some (NY, WA, MD) still have state-level estate or inheritance taxes. Your living trust or estate plan must account for ALL jurisdictions where you own assets.
Common Questions Wealthy Californians Ask About Estate Tax
What if my estate is below $13.6 million?
No federal estate tax due in 2025. But plan for 2026 when the exemption may be cut in half if the law sunsets (down to $7M or less).
Is inherited real estate income taxable?
No California income tax on inherited property, but capital gains apply if heirs sell at increased value post death. Basis steps up at death, reducing gain exposure. This is governed by IRS Publication 551.
Can gifts help me avoid estate tax?
Annual gifts under the federal exemption ($18,000 per donee/year in 2025) don’t count toward your lifetime limit. Large gifts (above exclusion) must be reported on Form 709 and apply against lifetime exclusion.
Will Prop 19 impact estate tax planning?
Not for federal estate tax. But inherited property may trigger a property tax reassessment unless specific “parent-child” transfer rules are met. Egregious mistakes here can add $30,000/year or more in property tax increases if the new rules are misunderstood (consult CA Board of Equalization for details).
KDA Case Study: HNW Family Avoids $8.6M Estate Tax Hit
Client: The Roberts family, HNW ($30M net worth, 2 children)
Situation: San Francisco real estate, privately held businesses, inherited investment portfolio. Original estate plan only had a basic living trust; no advanced tax planning. On track for $6.5M in federal tax on second death (would double to $13M if law sunsets in 2026).
KDA Solution: Coordinated irrevocable trust creation, annual $16,000 per child gifting over 4 years, Roth conversions, and timely Form 706 portability claim. Shifted $11M out of taxable estate with discounted family partnership transfer. Integrated Prop 19 property tax planning to keep family home’s tax base. Result: saved $8.6M federal estate tax, $102K/yr ongoing property tax, and protected legacy for 2 generations. First-year planning investment: $18,500. ROI: Over 46x.
Myth Bust: ‘California Killed My Children’s Inheritance’
Nope. The IRS may, if you miss federal rules and deadlines. The state isn’t your enemy (today). The threat is a federal tax bill, process mistakes, and poor asset titling. Not understanding federal estate tax is the most expensive secret in CA wealth circles.
Social-Shareable Mic Drop
The IRS won’t remind you: Without a single missed deadline, wealthy Californians are leaving family fortunes for the government to grab.
3 Takeaways for Email & Social
- California repealed its estate tax in 1982—federal law is your enemy now if your estate exceeds $13.6M ($27.2M couple) in 2025.
- Most living trusts do not prevent federal estate taxes—advanced legal planning required (think irrevocable trusts, GIFTs, ILITs).
- You can save millions for your heirs—but only if you act before the next law change. Don’t guess; strategize, track, and file everything on time.
FAQs: Federal & California Estate Tax 2025
Does California tax estates?
Not as of 2025. But check every few years—proposals to reinstate it pop up regularly.
What assets are subject to federal estate tax?
All U.S. and global assets for citizens and residents: real estate, investments, retirement, art, business interests—even some irrevocable trusts if not structured properly (IRS estate tax details).
Can I lower my estate below the IRS exemption?
Yes. Through gifting, trusts, valuation discounts, and smart asset division.
This information is current as of 8/5/2025. Tax laws change frequently. Verify updates with IRS or FTB if reading this later.
Book Your Custom Estate Tax Strategy Session
If your estate is approaching or above the federal exemption, don’t let your family lose what you’ve built. Our advanced estate tax planning strategies could save your heirs millions—and ensure your wealth passes with minimal IRS interference. Click here to book your confidential estate planning strategy session now.
