Considering the potential impact of taxes on your beneficiaries is essential in the estate planning process, but California residents, in particular, may be confused about how estate tax laws will impact the inheritance they wish to pass on.
Consultation with an attorney who specializes in estate planning will clarify the potential effects of the state’s estate tax laws on your future plans.
California Inheritance Tax
California does not have an estate tax, inheritance tax, or gift tax, and though there is currently no recent legislation aimed at reenacting estate taxes, it is always possible that laws can change in the future. That doesn’t mean that California residents are exempt from paying any estate taxes, only that they do not pay them at the state level.
Federal tax laws regarding the transference of wealth are still in effect for every citizen, but most estates aren’t large enough to trigger the federal estate tax; as of 2024, an estate must be valued at a minimum of $13.61 million to be taxed at the federal level.
What is the federal estate tax?
An estate tax is one placed on the assets you pass on to heirs when you die, such as property, cash, retirement accounts, and other items. Today, the federal threshold for state taxes is currently $13.61 million for individuals and $27.84 million for married couples. These numbers have risen since 2023, in which they were $12.92 million and $25.84 million, respectively.
How much can your estate be taxed?
Federal estate taxes may not be as oppressive as they first seem. For one, they are only applied to the amount that surpasses the threshold; for example, if you are unmarried and own an estate worth $14 million, your estate will only pay taxes on the amount exceeding the $13.61 million threshold.
The tax percentage is determined by the amount of taxable assets; in 2024, federal estate tax rates range from 18% to 40%.
Estate Taxes vs. Inheritance Taxes
The terms “estate tax” and “inheritance tax” are often used interchangeably, but they are not the same thing. The estate of the deceased person is liable for paying estate taxes, while inheritance taxes are the responsibility of the person receiving assets from a deceased individual.
The federal government does not levy inheritance taxes, only estate taxes, and currently, only six states maintain inheritance taxes instead of estate taxes. Maryland is the only state to require both estate and inheritance taxes, and California does not levy either estate or inheritance tax.
In addition, spouses are not required to pay inheritance taxes, and many states extend the tax exemption to immediate relatives.
What qualifies as a gift?
There are several exemptions and planning tips that can reduce the amount of federal estate taxes your estate will be responsible for when you pass. Gifting assets is one of them.
According to California tax law, any state resident can give a certain amount of their assets to another individual, tax-free, within a given year. As of 2022, the non-taxable amount of a gift is $16,000, but as with estate taxes, California residents are subject to federal taxation laws. For 2024, the annual federal gift tax exclusion is $18,000.
An advantage to gift-giving is that it reduces the amount of taxable assets in your estate. Heirs can benefit from a benefactor’s generosity while the benefactor is still alive, all while the estate enjoys a tax advantage.
The Bottom Line
Estate tax laws change frequently, and keeping up with their current requirements, while difficult, is necessary when planning your estate in Orange County. For help understanding how to protect your estate and pass on the largest amount of tax-free assets to your heirs, schedule a consultation with OC Wills and Trusts.
