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Updated on Monday, July 19, 2021
California tends toward the higher side when it comes to many taxes, but that isn’t the case for estate taxes. In fact, the Golden State has neither an estate tax nor an inheritance tax.
Federal and state governments may assess an estate tax on the value of a person’s estate, over an exemption amount, at the time of their death. While Californians won’t pay any state-level taxes, they could owe federal estate taxes depending on the size of the estate.
- Estate tax rate range: N/A
- Estate tax exemption in California: N/A
- Inheritance tax in California: N/A
- Federal estate tax in California: 18% to 40% on estates over $11.7 million
- Estate planning strategies in California: Unlimited marital deduction, trusts, GST tax, gift tax, charitable contributions
California estate tax
California does not have an estate tax. In fact, few states do — as of 2021, only 12 states and the District of Columbia impose an estate tax. Those states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington.
However, all U.S. residents can be subject to the federal estate tax, even though very few are. In 2021, only estates with combined gross assets and prior taxable gifts valued at over $11.7 million have to file a federal estate tax return and potentially pay the federal estate tax. As a result, the federal estate tax impacts less than 1% of estates in the U.S.
Estate tax exemption in California
Estate tax exemptions aren’t applicable, as there is no estate tax in California.
Inheritance tax in California
While an estate tax is charged against the deceased person’s estate, regardless of who inherits what, states with an inheritance tax assess it on the beneficiary (i.e., the person who inherits money or property from the estate). California also does not have an inheritance tax.
In fact, just six states do — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Notably, only Maryland has both an estate and an inheritance tax.
The federal government does not assess an inheritance tax.
Federal estate tax in California
California residents may not be subject to state-level estate and inheritance taxes, but as the state with the largest population of billionaires, many wealthy California residents may face the federal estate tax.
But even the estates of billionaires don’t have to pay the federal estate tax on 100% of the estate’s value.
To calculate the taxable amount of the estate:
- Add up the value (as of the date of death) of everything the decedent owned, including cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. This figure is the “Gross Estate.”
- Apply deductions, including mortgages and other debts, expenses for administering the estate, property taxes and gifts to charity.
- Add the value of any taxable gifts made during the decedent’s lifetime (from 1977 on).
- Apply the federal exemption, which is $11.7 million in 2021.
Only then are the progressive federal estate tax rates applied to the taxable amount.
|Federal Estate Tax Rates 2020-2021|
Taxable amount (estate value above the exemption)
|$1 - $10,000||18%||$0 base tax|
+ 18% on the taxable amount
|$10,001 - $20,000||20%||$1,800 base tax|
+ 20% on taxable amount
|$20,001 - $40,000||22%||$3,800 base tax|
+ 22% on taxable amount
|$40,001 - $60,000||24%||$8,200 base tax|
+ 24% on taxable amount
|$60,001 - $80,000||26%||$13,000 base tax|
+ 26% on taxable amount
|$80,001 - $100,000||28%||$18,200 base tax|
+ 28% on taxable amount
|$100,001 - $150,000||30%||$23,800 base tax|
+ 30% on taxable amount
|$150,001 - $250,000||32%||$38,800 base tax|
+ 32% on taxable amount
|$250,001 - $500,000||34%||$70,800 base tax|
+ 34% on taxable amount
|$500,001 - $750,000||37%||$155,800 base tax|
+ 37% on taxable amount
|$750,001 - $1 million||39%||$248,300 base tax|
+ 39% on taxable amount
|$1 million+||40%||$345,800 base tax|
+ 40% on taxable amount
In each tax bracket, the estate pays a base tax, plus the applicable rate on the income that falls within that bracket.
For example, if the taxable estate is $120,000, the tax owed would be the $23,800 base tax in the $100,001 to $150,000 bracket, plus 30% of the amount over $100,000 ($20,000 x 30% = $6,000). Thus, the total federal estate tax due would be $29,800 ($23,800 + $6,000).
How to pay your estate taxes
When someone dies with an estate worth more than the federal exemption amount, the executor of the estate is responsible for filing a federal estate tax return using Form 706. The estate tax return is due within nine months of the decedent’s death.
It’s a good idea to work with a professional tax preparer, CPA or tax attorney who has experience preparing estate tax returns to ensure you have all the right documentation supporting the value of the estate and complete the forms and supporting schedules correctly.
Estate planning strategies
There are several strategies for minimizing estate taxes. Working with a financial advisor may help you navigate some of these more complex solutions.
Unlimited marital deduction
As long as your spouse is a U.S. citizen, you can leave them an unlimited amount, either during your lifetime or upon your death. Transfers to surviving spouses aren’t subject to the federal estate or gift taxes.
Putting assets into a trust before death can reduce the taxable estate and help avoid estate taxes. A trust is essentially a financial arrangement between three parties: a trustor (the person who turns over the assets), a trustee (the person who manages the assets) and a beneficiary (the person who will inherit the assets).
There are several different kinds of trusts used in estate planning, but they generally fall into two broad categories:
- Revocable trusts. With a revocable trust, the trustor can alter, change, modify or revoke the trust at any time during their lifetime. Revocable trusts are useful for avoiding having assets go into probate after the trustor’s death, but they’re not useful for estate planning. Because the trustor still has control over the assets in the trust, they are still part of the taxable estate upon death.
- Irrevocable. An irrevocable trust typically cannot be altered, changed, modified or revoked after its creation. An irrevocable trust can help reduce or eliminate estate taxes because the assets in the trust are no longer part of the trustor’s estate.
Trust rules are complex, so it’s a good idea to consult with an estate planning attorney for help in selecting and setting up a trust.
In the past, wealthy families reduced their estate tax burden by “skipping” a generation of heirs and leaving or gifting the bulk of their wealth to grandchildren or great-grandchildren instead of their children. That way, a family would avoid the double estate tax bill that would have occurred if there were two transfers: one from parent to child and another from child to grandchild. The generation skipping transfer (GST) tax limited the usefulness of this strategy.
The GST tax imposes a tax equal to the highest federal estate tax (currently 40%) on transfers to a “skip person.” A skip person is someone two or more generations younger than the transferor. Grandchildren and great-grandchildren are skip persons, as are other close relatives, such as great-nieces and nephews. Unrelated beneficiaries who are more than 37½ years younger than the person making the gift also qualify as skip persons.
The GST tax only applies to transfers over an exemption amount. Currently, the GST tax exemption matches the federal estate tax exemption, meaning for 2021, it’s $11.7 million per person.
Another way to minimize estate taxes is to give your assets away while you’re living. The annual gift tax exclusion allows people to give away up to $15,000 per person per year without filing a gift tax return or having the gift included in their lifetime exemption limit. Married couples can give away $15,000 each. So, for example, if a married couple had three children, they could give $30,000 to each child, for a total of $90,000 per year.
If you give away more than the annual exclusion amount, you don’t necessarily have to pay tax on those gifts, but you do have to file a gift tax return, and those gifts will count toward your lifetime estate exemption limit.
Charitable contributions can also reduce the value of your estate and help you reduce or avoid estate taxes. There are several ways to accomplish this:
- Give to charity while you’re alive. If you itemize deductions, you can take a tax deduction for any charitable donations made while you’re living. Normally, the deduction for charitable contributions is limited to 60% of a taxpayer’s adjusted gross income. For 2021, the Consolidated Appropriations Act, 2021, temporarily suspended that limitation.
- Establish a charitable trust. Two types of charitable trusts can help reduce your estate tax exposure. You can place cash, stock, and other assets in a charitable lead trust. The trust then donates a specific amount to one or more charities each year over a set period. At the end of that period, the remaining assets in the trust are distributed to the trustor’s heirs. A charitable remainder trust allows you to place highly appreciated assets, such as stock, cash, real estate and other assets, into a trust. The trust can then sell the asset to defer the capital gains tax that the trustor would normally pay. The trust’s beneficiaries receive income over a set period, and one or more charitable organizations receive the remaining assets at the end of the trust’s term.
- Leave charitable bequests in your will. When you leave assets to a qualified charitable organization in your will, the value of these gifts isn’t included in your taxable estate. There’s no limit to the amount you can leave to charity in your will.
Including charitable giving in your estate plan can be complex, so it’s a good idea to consult with tax and financial advisors to determine the best strategy for your situation.
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