When planning for the future, many Californians have questions about estate taxes and inheritance taxes. The terms are often used interchangeably, but they are not the same. Understanding estate tax vs inheritance tax at both the state and federal levels is an important part of protecting family wealth and preparing for the transfer of assets.
California’s position on death taxes
California does not have either an estate tax or an inheritance tax. The state eliminated its inheritance tax in 1982 and its estate tax in 2005. This means:
- No California estate tax: The value of a deceased person’s estate is not taxed at the state level, regardless of its size.
- No California inheritance tax: Beneficiaries do not owe state taxes on the assets they inherit.
- No California gift tax: The state does not impose a gift tax on transfers made during a person’s lifetime.
For California residents, this provides relief from the complicated and often costly state-level taxes that exist in other parts of the country. However, families still need to be aware of the federal estate tax.
Federal estate tax
The federal estate tax applies only to very large estates. For 2025, the exemption amount is $13.99 million per individual. A married couple can combine their exemptions, allowing them to protect nearly $28 million from federal estate taxes.
The tax is applied only to the portion of the estate that exceeds the exemption threshold. It is also important to know who is responsible for paying. Unlike an inheritance tax, which is paid by the heirs, the federal estate tax is paid by the estate itself before assets are distributed.
For most families, the federal exemption means that they will not be subject to this tax. However, individuals with substantial assets may need to plan ahead in order to minimize the impact on their estate.
Potential tax pitfalls for Californians
Even without estate or inheritance taxes in California, there are still other potential tax considerations for families:
- Inheriting property from another state: If you inherit property from a state that has an estate or inheritance tax, you may still be liable for those taxes.
- Capital gains taxes: Inherited assets receive a “step-up in basis,” which means their cost basis is adjusted to fair market value at the time of death. If you later sell the asset for more than this amount, you will owe capital gains taxes on the profit.
- Property tax reassessment: Under Proposition 19, if you inherit a home but do not use it as your primary residence, the property will be reassessed at its current market value. This often leads to higher property taxes.
- State income taxes on inherited assets: While California does not tax the inheritance itself, it does tax income generated by inherited assets. For example, rental income from an inherited property would be subject to California state income tax.
Take the next step
If you have questions about estate tax vs inheritance tax, it is important to seek professional guidance. The rules surrounding taxes and inheritance can be complex, and careful planning can protect both your estate and your loved ones.
Call us today at (530) 343-3454 to schedule a consultation and learn how we can help you navigate estate planning in California.