Federal Estate Tax for California Residents

California has no state estate tax or inheritance tax. However, California residents are still subject to federal estate tax on estates exceeding the federal exemption amount.

For most Californians, federal estate tax will never apply. But high-value estates, especially with the exemption scheduled to decrease in 2026, should understand these rules and planning options.

Current Federal Estate Tax Rules

2025 Exemption Amount

$13.99 million per person

This means an individual can pass $13.99 million to heirs free of federal estate tax. Married couples can pass $27.98 million using portability.

Tax Rate

Estates exceeding the exemption are taxed at 40% on the excess.

Example:

• Estate value: $15 million
• Exemption: $13.99 million
• Taxable estate: $1.01 million
• Tax (40%): $404,000

What Is Included

The "gross estate" for federal estate tax includes:

• Real estate
• Bank and investment accounts
• Retirement accounts
• Life insurance death benefits
• Business interests
• Personal property
• Trust assets you controlled

The 2026 Sunset

What Happens

The current high exemption exists due to the 2017 Tax Cuts and Jobs Act. Without Congressional action, the exemption drops back to approximately $6-7 million (adjusted for inflation) on January 1, 2026.

Impact on California Estates

With a lower exemption:

• More California estates will owe estate tax
• A single $10 million estate could owe over $1 million in tax
• Planning becomes more critical

Uncertainty

Congress may extend the high exemption, make it permanent, or let it sunset. Planning must account for this uncertainty.

California's Position

No State Estate Tax

California does not impose:

• State estate tax
• State inheritance tax
• State gift tax

No Death Tax

When a California resident dies:

• Only federal estate tax potentially applies
• Heirs receive inheritances tax-free at the state level
• Income tax may apply when heirs sell inherited assets

Compared to Other States

California's lack of state estate tax is favorable for high-net-worth individuals.

Gift Tax Basics

Unified System

Federal gift tax and estate tax share a single unified exemption:

• Lifetime gifts over annual exclusions reduce your estate tax exemption
• At death, remaining exemption applies to your estate

Annual Exclusion

In 2025, you can give $19,000 per recipient without using any exemption:

• Married couples: $38,000 per recipient together
• Unlimited number of recipients
• Resets each calendar year

Reporting Requirements

Gifts over the annual exclusion require Form 709 (Gift Tax Return) even if no tax is owed.

Portability Between Spouses

What Is Portability?

When the first spouse dies without using their full exemption, the surviving spouse can use the unused portion.

Example

• Husband dies in 2025 with $5 million estate
• His exemption: $13.99 million
• Unused: $8.99 million
• Wife can add $8.99 million to her own exemption
• Wife's total exemption: $22.98 million

Requirements

To preserve portability:

• File Form 706 (Estate Tax Return) even if no tax is owed
• Make the portability election on the return
• File within 9 months of death (extension available)

Why It Matters

Without filing Form 706:

• Unused exemption is lost forever
• Surviving spouse has only their own exemption
• Future estate tax liability may increase

Common Mistake

Families assume no Form 706 is needed because the estate is below the exemption. This loses the portability benefit.

Life Insurance and Estate Tax

The Problem

Life insurance death benefits are included in your estate if:

• You own the policy
• You have "incidents of ownership" (right to change beneficiary, borrow against policy, etc.)

The Impact

A $5 million policy can push an otherwise exempt estate into taxable territory.

Example:

• Other assets: $10 million
• Life insurance: $5 million
• Total estate: $15 million
• Taxable amount: $1.39 million
• Tax: $556,000

The Solution: ILIT

An Irrevocable Life Insurance Trust (ILIT):

• Owns the policy instead of you
• Removes insurance from your estate
• Must be properly structured and administered
• Requires giving up control of the policy

Three-Year Rule

If you transfer an existing policy to an ILIT and die within three years, the insurance is still included in your estate. New policies purchased by the ILIT avoid this rule.

Planning Strategies

For Estates Under the Exemption

Most California estates:

• No federal estate tax planning needed
• Focus on avoiding probate
• Use beneficiary designations
• Consider income tax planning (step-up in basis)

For Estates Near the Exemption

$10-15 million range:

1. Maximize annual exclusion gifts

   • $19,000 per recipient per year (2025)
   • Reduces estate value
   • No gift tax or estate tax impact

2. Use portability

   • File Form 706 at first death
   • Preserve unused exemption

3. Consider ILIT for life insurance

   • Remove insurance from estate
   • Provide liquidity for estate expenses

For Large Estates

Over $15 million:

1. Spousal Lifetime Access Trust (SLAT)

   • Gift to irrevocable trust for spouse
   • Uses exemption now while it is high
   • Spouse can benefit from trust

2. Grantor Retained Annuity Trust (GRAT)

   • Transfer appreciating assets
   • Receive annuity payments back
   • Appreciation passes to heirs tax-free

3. Family Limited Partnerships (FLP)

   • Discount value of transferred interests
   • Maintain control while reducing estate
   • Must have legitimate business purpose

4. Charitable Planning

   • Charitable remainder trusts
   • Charitable lead trusts
   • Donor-advised funds
   • Reduce estate while benefiting causes

Form 706: Federal Estate Tax Return

When Required

File Form 706 if:

• Gross estate exceeds filing threshold
• You want to elect portability
• You made large lifetime gifts

Filing Threshold

For 2025 deaths: Generally required if gross estate plus adjusted taxable gifts exceeds $13.99 million.

Deadline

Nine months after death. Automatic six-month extension available by filing Form 4768.

What It Includes

• Complete inventory of assets
• Valuations as of date of death
• Deductions (debts, expenses, charitable gifts)
• Calculation of tax due
• Election of various options

Valuation Issues

Date of Death Value

Assets are valued as of the date of death for estate tax purposes.

Alternate Valuation Date

The executor can elect to value assets six months after death if:

• It reduces the estate's value
• It reduces the estate tax

This helps when assets decline after death.

Appraisals

Professional appraisals are needed for:

• Real estate
• Business interests
• Collectibles and art
• Closely held stock

Discounts

Certain assets may qualify for valuation discounts:

• Lack of marketability
• Minority interest
• Blockage (large stock holdings)

Discounts must be properly documented and supported.

State Death Tax Credit

Historical Background

Before 2005, federal estate tax included a credit for state death taxes. This encouraged states to impose "pick-up" taxes.

Current Status

The credit was replaced by a deduction. California does not impose a death tax, so there is no deduction for California residents.

Common Mistakes

Not Filing Form 706 for Portability

Even below the exemption, failing to file loses the portability benefit.

Forgetting Life Insurance

Life insurance is often overlooked but fully includable in the estate.

Undervaluing Assets

The IRS actively audits estate tax returns. Aggressive valuations invite scrutiny.

Ignoring the 2026 Sunset

Planning as if the high exemption will last forever is risky.

Waiting Too Long

Estate tax planning takes time. Rushed planning near death limits options.

Frequently Asked Questions

Does California have an estate tax?

No. California has no state estate tax or inheritance tax. Only federal estate tax may apply to California residents.

What is the federal estate tax exemption in 2025?

$13.99 million per person. Married couples can effectively exempt $27.98 million using portability.

When is estate tax due?

Federal estate tax is due nine months after death. Extensions are available for filing but not for payment.

Is life insurance subject to estate tax?

Yes, if you own the policy or have incidents of ownership. Life insurance owned by an irrevocable trust (ILIT) can be excluded.

What happens to the exemption in 2026?

Without Congressional action, the exemption drops to approximately $6-7 million (inflation-adjusted) on January 1, 2026.

Related Guides

• California Step-Up in Basis
• California Probate Process
• California Revocable Living Trust

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Sources:

• "Internal Revenue Code Sections 2001-2210," Cornell Law School Legal Information Institute, 2024, https://www.law.cornell.edu/uscode/text/26/subtitle-B
• "Instructions for Form 706," Internal Revenue Service, 2024, https://www.irs.gov/instructions/i706
• "Tax Cuts and Jobs Act of 2017," Public Law 115-97, Congress.gov, 2017, https://www.congress.gov/bill/115th-congress/house-bill/1

This guide provides general information about federal estate tax. Estate tax planning is complex. Consult with a qualified estate planning attorney and tax advisor for advice specific to your situation.