Understanding estate taxes is crucial for effective financial planning. This guide aims to simplify the complexities of estate taxation, and highlight key considerations and resources for residents of the Golden State.

What Is An Estate Tax (or “Death Tax”)?

An estate tax, often referred to as a "death tax", is a financial charge on an individual's estate after their passing. It's calculated based on the total value of the individual's assets, including property, investments, and cash. However, this tax is not imposed on all estates, but rather those exceeding a specific value threshold. 

The rate of this tax can vary significantly as it is influenced by factors such as the estate's size and state-specific laws. It’s also important to understand that this tax is separate from inheritance tax, which is levied on the recipients of the estate. 

The primary purpose of the estate tax is to generate revenue for the government and, in some cases, to encourage the distribution of wealth. Understanding estate taxes is crucial for estate planning. It aids in creating strategies to reduce the estate's tax burden, ensuring a smoother transfer of assets to beneficiaries.

What Is The Federal Estate Tax?

The federal estate tax is a levy by the U.S. government on the transfer of the estate of a deceased person. It applies to estates exceeding above a certain value, which is periodically adjusted. 

Presently, estates valued above $13.61 million for individuals and $27.22 million for couples are subject to this tax. The federal estate tax rate from that point on can range from 18% to 40%.

It's important to understand that not all assets are considered equally for tax purposes. Some, like life insurance payouts, may be exempt under certain conditions. The federal estate tax also allows for deductions, including debts and funeral expenses, potentially reducing the taxable value of the estate. Charitable contributions made by the estate can further reduce the tax liability.

Please Note: Currently, the Tax Cuts and Jobs Act is scheduled to lapse at the conclusion of 2025. Consequently, beginning in 2026, the exemption for federal gift and estate taxes will revert to its pre-2018 amount, which was $5,000,000 for individuals, adjusted for inflation to reflect current values.

What Is The Death Tax In California?

California does not impose a state-level estate (or “death”) tax. This means that for residents of California, their estates are not subject to additional state taxes upon their passing. However, this does not exempt Californians from the federal estate tax, which will still apply to estates exceeding the established threshold.

The absence of a state estate tax in California can be very advantageous. It potentially allows for a larger portion of an individual’s estate to be passed on to their heirs, compared to states that impose a death tax. 

However, this status could change with new legislation, so it's advisable for residents to stay informed about any potential shifts in tax laws. Understanding the interplay between state and federal estate taxes is crucial for effective estate planning.

California Inheritance Tax and Gift Tax

Unlike many states, California does not levy an inheritance tax. This means that recipients of an inheritance in California do not face a state tax burden on assets received from a deceased person's estate. 

Gift tax, on the other hand, is governed by federal law, not state law. Individuals can give up to $18,000 per year per recipient without incurring a federal gift tax in 2024. For a married couple, this amount doubles, allowing a combined gift of up to $36,000 to an individual without triggering the tax. It's important to note that this limit applies to the donor, not the recipient.

Gifts exceeding the annual exemption limit must be reported to the IRS. However, they may not necessarily result in an immediate tax burden. Instead, they count towards the lifetime gift and estate tax exemption. In 2024, the lifetime gift and estate tax exemption for individuals is $13.61 million. 

Other California Taxes

Even though California does not have a state estate tax or inheritance tax, residents still face one of the highest tax burdens in the nation. This state’s tax structure includes a variety of taxes that Californians should be aware of:

State Sales Tax: California's state sales tax rate stands among the highest in the United States. This tax is applied to most goods and services purchased within the state. It’s a key revenue source for the state government, funding various public services.

Property Taxes: Property owners in California are subject to property taxes. These taxes are based on the assessed value of real estate, including land and buildings. Property taxes are a significant source of funding for local services like schools, police, and fire departments.

Income Taxes: California has a progressive income tax system, with rates ranging from low to high depending on income levels. The state's income tax rates are among the highest in the nation, especially for high-income earners. This tax is a major contributor to the state's revenue.

Corporate Taxes: Businesses operating in California are subject to corporate taxes. The rate varies based on the company's income level. These taxes contribute to the state's budget, supporting various public programs and services.

Excise Taxes: Excise taxes in California are levied on specific goods such as gasoline, alcohol, and tobacco. These taxes are typically included in the price of the product and are used to fund specific state programs and initiatives.

Understanding these taxes is crucial for residents and businesses in California. It helps in financial planning and ensures compliance with state tax laws. Despite the absence of estate and inheritance taxes, the overall tax structure in California is still complex and significant.

Estate Planning Tools You Can Use:

Estate planning encompasses a variety of tools, each tailored to reduce the taxable estate and achieve specific financial objectives. Among these tools, certain strategies stand out for their effectiveness:

Annual and Lifetime Exclusions: These allow individuals to gift set amounts annually to multiple recipients without incurring gift taxes. The lifetime exclusion also plays a crucial role, setting a cap beyond which gift and estate taxes apply.

Trusts: Various trusts serve different purposes. For instance, Grantor Retained Annuity Trusts (GRATs) are effective for passing on asset appreciation, while Irrevocable Life Insurance Trusts (ILITs) can exclude life insurance from the taxable estate. Charitable Remainder Trusts (CRTs) balance income generation with philanthropy, offering notable tax benefits.  

Donor-Advised Funds (DAFs): DAFs are increasingly popular for philanthropic estate planning. They allow donors to make charitable contributions and receive immediate tax deductions. The "superfunding" feature of DAFs allows for a lump-sum contribution that maximizes immediate tax benefits while retaining advisory rights over fund distributions.

Family Limited Partnerships (FLPs): FLPs are instrumental in managing family assets, offering control and tax efficiency. They involve family members as partners, where parents typically hold a controlling interest. FLPs can be used for asset protection and reducing estate taxes through gifting limited partnership interests.

Wills: Wills are a fundamental tool in estate planning. They ensure that an individual's assets are distributed according to their wishes after their passing. Wills are vital for specifying guardians for minor children, designating executors, and providing clear directions for the distribution of assets, thereby potentially mitigating disputes and legal challenges.

Please Note: These are just some of the tools that individuals have at their disposal. Proper estate planning professionals can help clarify the complexities and nuances of each option, ensuring that strategies are tailored to individual circumstances and goals.

Essential Estate Planning Professionals In California

Estate planning in California can be a complex process, requiring expertise in various areas of finance and law. Assembling the right professional team is essential to navigate this intricate landscape effectively. The right experts bring a wealth of knowledge and experience, ensuring that every aspect of estate planning is addressed with precision and care:

Estate Planning Attorneys: These legal professionals specialize in estate law. They are crucial for drafting essential documents like wills and trusts. They provide legal advice on how to structure an estate plan to ensure it aligns with California laws and effectively manages potential estate taxes and legal challenges.

Financial Advisors: Financial advisors offer guidance on the financial aspects of estate planning. They can assist in asset valuation, investment strategies, tax planning, and planning for retirement. Their expertise is invaluable in aligning financial goals with estate planning objectives, ensuring assets are managed and distributed as intended.

Tax Professionals: Navigating the complexities of estate, gift, and income tax laws is a task for experienced tax professionals. They can provide strategies to minimize tax liabilities and help ensure compliance with both federal and California state tax laws. CPAs, for example, can be essential for managing the financial records and tax filings of an estate. 

Let Us Help You With Your Estate Planning In California

At Burton Enright Welch, we understand that navigating the challenges of estate planning can be a daunting task, especially in a state with unique tax structures like California. Our expertise in helping Californians with their estate planning needs is rooted in our deep understanding of both federal and state-specific tax regulations. We recognize that each individual's situation is unique, and we're committed to providing personalized strategies that align with your specific financial goals and estate planning objectives.

Collaboration is key in effective estate planning. We are more than happy to work alongside your existing estate planning attorney and tax professionals to ensure a cohesive and thorough plan. Alternatively, if you're seeking new professional advice, we can recommend experts from our vetted professional network. Our goal is to ensure that you have access to the best possible guidance and resources. 

Understanding the evolving landscape of estate and gift taxes is crucial, particularly with upcoming changes like the expiration of the Tax Cuts and Jobs Act. As these changes take effect, we're ready to help you adapt your estate planning strategies accordingly. Our team stays aware of the latest developments in tax laws and regulations, both federally and in California, to provide you with the most current and effective planning advice.

Your estate represents a lifetime of hard work, dedication, and care. It's essential that it's managed and transferred according to your wishes. At Burton Enright Welch, we're committed to helping you achieve just that. Let us help you navigate the complexities of estate planning with ease and confidence. Schedule your complimentary appointment today to start the conversation and take a significant step towards securing your legacy.