California Estate Tax Planning Strategies

Estate planning is an essential part of building and protecting wealth, especially for high-net-worth individuals in California facing a shifting federal tax landscape. While California currently does not impose a state-level estate or inheritance tax, federal estate taxes can still significantly impact large estates.

Staying ahead of these changes is critical to minimizing future tax liabilities and preserving your legacy for generations to come. This guide breaks down what you need to know about estate tax rules in California, dispels common myths and outlines advanced strategies that can help you take advantage of current laws while planning confidently for the future.

DOES CALIFORNIA HAVE AN ESTATE TAX?

If you're a California resident planning for your financial future, you may be asking: Does California tax my estate? The answer – for now – is no. California does not impose a state-level estate tax or inheritance tax. In fact, the state repealed its estate tax in 1982 through a voter-approved ballot measure.

However, the absence of a state estate tax doesn’t mean your estate will be tax-free.

UNDERSTANDING THE DIFFERENCE: ESTATE TAX VS. INHERITANCE TAX

It’s common to confuse estate tax and inheritance tax, but they affect different parts of the wealth transfer process:

• Estate tax is levied on the total value of a person’s estate before the assets are distributed to heirs
• Inheritance tax is paid by the individual receiving the inheritance, based on the value they receive and their relationship to the decedent

Currently, California has neither but the federal estate tax still applies and it can significantly impact high-value estates.

WHY FEDERAL ESTATE TAX STILL MATTERS

Even without a state-level tax, federal estate tax laws apply to California residents whose estates exceed the federal exemption threshold. In 2025, that exemption is $13.99 million per individual, and married couples can combine their exemption amounts.

This is especially important for high-net-worth households in California, where real estate alone can quickly push an estate above federal thresholds. Homes in markets like San Francisco, San Diego and Santa Clara County often exceed $2 million, making proactive planning essential.

WHAT THIS MEANS FOR YOUR ESTATE PLAN

As we’ve reviewed, just because California doesn’t currently collect estate or inheritance tax doesn’t mean your estate is shielded from tax exposure. Relying on outdated assumptions could result in missed opportunities or even unexpected tax liabilities.

A well-crafted estate plan should consider:

• Your total taxable estate, including real estate, investments, life insurance, business interests and retirement accounts
• How to minimize exposure to the federal estate tax
• Strategies to reduce the impact of capital gains tax and income tax for your heirs

By working with a financial advisor, you can tailor your estate strategy to reflect both current tax laws and the realities of living – and passing on wealth – in California.

UNDERSTANDING RELATED TAXES

Planning proactively can allow you to leverage the current tax provisions, including:

• Gift Tax: The gift tax applies to lifetime transfers of assets. The annual gift tax exclusion for 2025 allows you to give up to $19,000 per recipient without using up your lifetime exemption. This exemption is adjusted for inflation each year.
• Generation-Skipping Transfer Tax: This applies to transfers that skip a generation (e.g., from grandparent to grandchild) and is levied in addition to the estate or gift tax.

USE WEALTH TRANSFER STRATEGIES TO HELP PROTECT YOUR ESTATE

Preserving wealth across generations takes more than a last will and testament. For high-net-worth Californians, proactive estate tax planning can reduce future tax exposure and help ensure more of your assets go to the people and causes that matter most to you.

Several legal and financial strategies can help shrink your taxable estate, increase flexibility and transfer wealth more efficiently.

LIFETIME GIFTING

One of the simplest and most effective tools in estate tax planning is lifetime gifting. By using the annual gift tax exclusion, you can gradually reduce your gross estate over time – potentially avoiding a large federal estate tax bill later.

Strategically gifting to children, grandchildren or irrevocable trusts for their benefit can:

• Help fund education costs without triggering gift tax
• Shift appreciating assets out of your estate, freezing future estate tax exposure
• Allow you to witness the impact of your giving during your lifetime

IRREVOCABLE TRUSTS

Irrevocable Trusts are essential in any advanced estate plan. Irrevocable trusts can remove assets from your estate, shielding them from future estate tax. Common types include:

• Irrevocable Life Insurance Trusts: Hold life insurance policies outside your estate, so death benefits are not counted toward your taxable estate
• Grantor Retained Annuity Trusts: Transfer appreciating assets to heirs while retaining annuity payments and minimizing gift tax
• Crummey Trusts: Hold annual exclusion gifts made to minor children or young adults

FAMILY LIMITED PARTNERSHIPS

For clients with significant business or real estate holdings, Family Limited Partnerships may be a powerful tool. FLPs allow you to:

• Transfer ownership interests to family members over time at a potentially discounted value due to lack of control and marketability
• Maintain control over management and operations

MULTIGENERATIONAL PLANNING

Transferring wealth isn’t just about the next generation – it’s about creating a legacy. Through the use of generation-skipping trusts, dynasty trusts or direct gifts to grandchildren, you can reduce exposure to both estate tax and the generation-skipping transfer tax.

Multigenerational strategies can:

• Preserve family wealth beyond your children’s lifetimes
• Offer transfer tax-efficient support for education, health care or homeownership
• Reduce the need for future gifting and estate restructuring

OPTIMIZE CALIFORNIA REAL ESTATE FOR ESTATE PLANNING

For many high-net-worth individuals in California, real estate is the most valuable part of their estate. With high property values in regions like San Diego, San Francisco and Santa Clara County, for example, careful planning can help minimize taxes and protect wealth.

BASIS ADJUSTMENT

When heirs inherit property, the cost basis resets to the fair market value at the time of death. This basis adjustment can significantly reduce or eliminate capital gains taxes if the property is sold, preserving more value for your beneficiaries.

COMMUNITY PROPERTY RULES

California is a community property state, which means both spouses’ shares of community property receive a basis adjustment when one spouse dies. This can create meaningful income tax savings for surviving spouses.

REGIONAL CONSIDERATIONS

In high-growth markets, real estate appreciation can quickly push estates above the federal exemption limit. Proactive planning is key to preserving long-term value and avoiding unnecessary tax exposure.

INCORPORATE CHARITABLE GIVING INTO YOUR ESTATE STRATEGY

For many high-net-worth individuals, philanthropy is a key part of their legacy. Fortunately, charitable giving also presents several strategic tax planning opportunities:

CHARITABLE GIVING TOOLS

• Donor-Advised Funds: Allow you to make charitable contributions, receive an immediate tax deduction and recommend grants over time
• Charitable Remainder Trusts: Provide income to you or your beneficiaries for a set term, with the remainder going to charity
• Private Foundations: Allow you to create a long-term philanthropic legacy with family involvement

Giving during your lifetime – not just after death – can also help avoid certain transfer taxes and allow you to witness the impact of your generosity.

DEBUNKING ESTATE TAX MISCONCEPTIONS IN CALIFORNIA

Misunderstandings about estate taxes are common. Let’s clarify a few key points:

Myth: “California will tax my estate.”

Truth: California does not have a state estate or inheritance tax.

Myth: “I don’t need to worry about estate tax.”

Truth: If your estate exceeds the federal estate tax exemption, it could be subject to a 40% tax rate.

Myth: “Capital gains tax and estate tax are the same.”

Truth: They are distinct. Capital gains tax applies when assets are sold, while estate tax applies upon death if the estate exceeds the federal exemption.

Understanding the real tax implications for California residents, especially those with high-value assets and real estate, is important for crafting a strong estate plan.

HELP PROTECT YOUR LEGACY WITH PROFESSIONAL ESTATE TAX PLANNING

With estate tax laws set to change and the 2026 exemption reduction on the horizon, now is the time to put a plan in place. At Edelman Financial Engines, our advisors bring deep expertise in strategic tax planning, California real estate considerations, values-based charitable giving and personalized multigenerational wealth transfer.

We work closely with high-net-worth individuals to develop comprehensive plans that align with their financial goals, help minimize tax exposure and reflect what matters most. Let’s start building a strategy that can help protect your legacy and provide peace of mind for the future.

For personalized guidance, always consult with qualified professionals who can provide advice based on your specific financial situation, potential estate tax implications and any inheritance tax concerns.