## Estate-tax planning in California Federal and California estate / inheritance tax can take a significant bite out of large estates. Strategic planning during life can dramatically reduce or eliminate the bite. ## Federal estate tax **2025 thresholds:** - **Individual exemption: $13.99M** - **Married couple: ~$27.98M** (with portability) - **Annual gift exclusion: $19,000 per recipient** - **Lifetime gift / GST exemption: $13.99M** (counts against estate exemption) - **Tax rate above exemption: 40%** **2026 sunset (TCJA expiration):** - TCJA passed 2017 doubled exemption - WAS scheduled to sunset Dec 31, 2025 - Cut exemption roughly in half (~$7M individual) - BUT extension passed → exemption remains elevated - Always check current law as Congress acts ## State estate / inheritance taxes **As of 2026, states with their own estate / inheritance taxes:** **Estate tax states (paid by estate):** - Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, DC - Most have lower exemptions than federal ($1M-$13M typical) - Rates 10%-20% typical **Inheritance tax states (paid by recipient):** - Iowa (phasing out), Kentucky, Maryland (also has estate), Nebraska, New Jersey, Pennsylvania - Often graduated by relationship (spouses + children pay less) **No state estate / inheritance tax** in most states (including TX, FL, CA, etc.) ## Generation-Skipping Transfer (GST) tax **Federal GST tax:** - 40% on transfers to grandchildren (skipping children) - Same exemption as estate tax - Important for dynasty planning - Inclusion ratio determines actual tax ## Common estate tax planning strategies **1. Annual gifting:** - Use annual exclusion ($19K/2025) - Married couple: $38K per recipient - Doesn't count against lifetime exemption - Compound effect over years - Children + grandchildren common targets **2. 529 plans:** - Education-specific tax benefits - 5-year forward gift permitted ($95K single contribution per donor) - Owner retains control - ${s.name}-specific state tax benefits **3. Lifetime gifting (using exemption):** - Use exemption while alive (avoid future tax) - Asset appreciation occurs OUTSIDE estate - Permanent reduction of taxable estate - Best for assets expected to appreciate **4. Irrevocable Life Insurance Trust (ILIT):** - Removes life insurance from estate - Premiums paid via Crummey gifts - Trust beneficiaries receive tax-free death benefit - Avoids paying estate tax with insurance proceeds **5. Grantor Retained Annuity Trust (GRAT):** - Transfer asset to trust, retain annuity for term - If asset appreciates above IRS rate (Section 7520), excess passes tax-free - Risk: estate inclusion if grantor dies during term - Effective with appreciating assets **6. Spousal Lifetime Access Trust (SLAT):** - One spouse creates trust for other - Uses creator's exemption - Other spouse can benefit during life - Effective for high-net-worth couples **7. Qualified Personal Residence Trust (QPRT):** - Transfer home to trust, retain right to live in it - Discount to gift value - Asset removed from estate after term - Risk: estate inclusion if grantor dies during term **8. Charitable Lead Trust (CLT) / Charitable Remainder Trust (CRT):** - Combine charity + family planning - Tax deductions during life - Strategic for charitable goals **9. Family Limited Partnership (FLP) / Family LLC:** - Hold family assets - Discount valuation for minority / non-marketable interests - Centralized management of family wealth - IRS scrutiny if mere tax shelter **10. Dynasty trust:** - Multi-generational wealth transfer - Avoids estate tax in each generation - States with no rule against perpetuities (DE, NV, AK, SD) preferred - GST exemption critical **11. Step-up in basis preservation:** - Heirs receive stepped-up basis at death - Sometimes better to hold appreciated assets until death - Compare to gifting carryover basis - 1014(e) limit for assets gifted-back-to-deceased **12. Defective grantor trust (IDGT):** - Income tax to grantor (further reducing estate) - Estate tax exclusion on assets - Combined with GRAT or SLAT ## Portability — ESSENTIAL for married couples **Deceased Spousal Unused Exclusion (DSUE):** - Surviving spouse can use deceased's unused exemption - Doubles couple's effective exemption - Requires Form 706 estate-tax return at first death - ELECTION REQUIRED — easy to miss **Even if estate is below threshold, file Form 706 to elect portability!** ## Marital deduction **Unlimited marital deduction:** - Transfers between spouses tax-free - Both during life and at death - Spouse must be U.S. citizen (otherwise QDOT required) - Defers tax to second death - Combined with portability + bypass trusts for optimization ## Charitable deduction **Estate tax charitable deduction:** - Unlimited deduction for charitable bequests - Reduces taxable estate dollar-for-dollar - Combined with charitable trusts during life - Public charities + private foundations both qualify ## Common mistakes - **Doing nothing** — even modest planning helps - **Old documents** — estate plans need updating - **Forgetting portability** — costs surviving spouse - **Improper trust funding** — assets must be retitled - **Ignoring state tax** — high-tax states need state-specific planning - **Failing to coordinate beneficiary designations** with plan - **Insurance owned by insured** — included in estate - **Joint property assumptions** — bypasses planning - **Outdated POA / healthcare directive** ## Documents typically needed - **Will** - **Revocable living trust** - **Durable power of attorney (financial)** - **Healthcare power of attorney + living will** - **HIPAA authorization** - **Beneficiary designations** (retirement, life insurance, TOD) - **Letter of instruction (informal)** - **Digital asset directive** - **${s.name}-specific forms** ## When you need professional help **Hire estate-planning attorney + CPA team for:** - Estates approaching exemption ($10M+) - Multi-state property - Closely-held businesses - Blended families - Special-needs beneficiaries - Charitable goals - Asset protection concerns - International issues ## What you should do If your California estate may exceed $5M (or you have specific concerns): consult an estate-planning attorney with high-net-worth experience. Many California estate-planning attorneys offer flat fees for plan creation. Annual review recommended (especially around tax law changes). CPAs help with specific calculations + Form 706 returns. --- *This guide is general information about federal and California law as of mid-2026 and is not legal or tax advice. Estate tax planning is highly technical. Talk to a licensed California estate-planning attorney + CPA about your specific situation.*