QUESTIONS?
What Is the Estate Tax (Simple) — FAQ
Our team is here to answer your questions and help you protect your legacy. If you’d like guidance tailored to your situation, schedule a time to talk with us.
Get StartedWhat Is the Estate Tax?
Think of the estate tax as a tax on really big inheritances. When someone dies and leaves behind a lot of money and property, the government might take a percentage before the family gets it. It's like a "transfer tax" on wealth passing from one generation to the next.
Here's the thing though - most families never pay this tax. The government only taxes estates worth millions of dollars. For 2024, your estate needs to be worth more than $13.61 million before federal estate tax kicks in. That's a lot of money! This threshold is per person, meaning it applies to each individual's total estate value at the time of death.
Does California Have an Estate Tax?
Good news for California families: California doesn't have its own estate tax. You only need to worry about federal estate tax rules.
Some states like New York and Washington have their own estate taxes with lower thresholds. But California eliminated its state estate tax years ago. This makes estate planning a bit simpler for California residents, especially when compared to residents of states with both federal and state estate tax obligations.
However, California does have high income tax rates that can affect your estate planning strategies. Your estate planning attorney can help you navigate these waters and determine the best approach for your specific situation.
How Much Is the Federal Estate Tax?
The federal estate tax rate ranges from 18% to 40%. Most taxable estates pay the top rate of 40%. The rate structure is progressive, but given the high exemption threshold, most estates that owe tax end up in the highest bracket.
Let's say someone dies with an estate worth $15 million in 2024. Here's the simple math:
- Total estate: $15 million
- Minus exemption: $13.61 million
- Taxable amount: $1.39 million
- Tax owed: About $556,000 (40% rate)
The family would get about $14.44 million instead of the full $15 million. While this might seem like a lot, it's important to remember that the first $13.61 million passed completely tax-free.
What Counts Toward Your Estate?
The IRS counts almost everything you own when you die:
- Your house and other real estate
- Bank accounts and investments
- Life insurance policies you own
- Business interests
- Personal property like cars, jewelry, and art
- Retirement accounts like 401(k)s and IRAs
They also look at gifts you made during your lifetime. Large gifts count against your lifetime exemption. The IRS values these assets at their fair market value on the date of death, which can sometimes lead to disputes over valuations, particularly for unique assets like businesses or collectibles.
What About Married Couples?
Married couples get a sweet deal. When one spouse dies, everything can pass to the surviving spouse tax-free. This is called the "unlimited marital deduction." This powerful tool allows couples to defer estate taxes until the second spouse's death.
Even better, the surviving spouse can use their deceased spouse's unused exemption. This is called "portability." So a married couple can potentially shield over $27 million from estate taxes in 2024. However, to claim portability, the executor must file an estate tax return for the first spouse to die, even if no tax is owed.
But here's the catch - this only works for U.S. citizen spouses. If your spouse isn't a U.S. citizen, different rules apply, and you may need to explore specialized trust structures to achieve similar benefits.
Understanding Trusts and Estate Tax Planning
Many wealthy families use trusts as part of their estate tax planning strategy. Trustees can manage assets in ways that minimize estate tax exposure while still providing for beneficiaries. For example, understanding what a trust is in plain English can help you determine if this strategy makes sense for your family.
Trust planning isn't just for the ultra-wealthy anymore. With California's high property values, even middle-class families might benefit from trust strategies. Avoiding probate with a trust can also provide privacy benefits and streamline the transfer process for your heirs.
Common Questions About Estate Tax
Do I Need to File an Estate Tax Return?
You need to file Form 706 if the estate is worth more than the exemption amount, even if no tax is owed. This might happen if you're claiming portability or made large lifetime gifts. The form is quite complex and typically requires professional assistance.
The return is due nine months after death, but you can get a six-month extension. Missing deadlines can result in penalties and the loss of certain tax benefits, so timing is crucial.
What Happens if I Can't Pay the Tax?
The IRS offers payment plans in some cases. You might be able to pay over several years, especially if the estate includes a family business or farm. Section 6166 of the tax code allows qualifying estates to pay tax in installments over up to 14 years.
Some families take out life insurance to help cover estate taxes. Others use trusts or make lifetime gifts to reduce the taxable estate. Life insurance proceeds aren't taxable income to beneficiaries, making them an efficient way to provide liquidity for tax payments.
Can I Give Money Away to Avoid Estate Tax?
Yes, but there are limits. In 2024, you can give $18,000 per person per year without it counting against your lifetime exemption. This is called the "annual exclusion." Married couples can effectively give $36,000 per recipient by "gift splitting."
You can give more, but it uses up your lifetime exemption. Think of it like a big bucket - gifts and your estate at death all count toward filling that bucket. Strategic gifting can be particularly effective if you expect your assets to appreciate significantly over time.
Is the Estate Tax Going Away?
The current high exemption amounts are set to expire in 2026. Unless Congress acts, the exemption will drop to about $6-7 million per person (adjusted for inflation). This "sunset provision" was built into the 2017 Tax Cuts and Jobs Act.
This means more California families might face estate taxes in the future. If you're close to these amounts, it's smart to plan ahead. Some experts recommend taking advantage of the current high exemptions while they're still available through strategic gifting or trust planning.
California-Specific Considerations
Even without a state estate tax, California families face unique challenges:
High Property Values: California real estate values can push estates over the federal threshold faster than in other states. A modest home in San Francisco or Los Angeles might be worth $2-3 million alone. This means that even families who don't consider themselves "wealthy" might need estate tax planning.
Proposition 19: This 2020 California law changed how property tax assessments transfer between generations. It can affect your estate planning strategies, particularly for families with significant real estate holdings. The new rules limit the property tax benefits that can pass to children and grandchildren.
Community Property: California is a community property state. This affects how assets are valued and transferred at death and can impact both estate tax liability and income tax basis step-up benefits for surviving spouses.
The Role of Professional Documents
Estate tax planning often involves more than just tax considerations. You'll need proper legal documents to implement your strategy effectively. A comprehensive will is essential, even if most of your assets pass through trusts or other mechanisms. Don't overlook the importance of keeping your estate plan private - estate tax returns become public records, but proper planning can minimize what information becomes available.
Simple Planning Strategies
If you're worried about estate taxes, here are basic strategies to consider:
Make Annual Gifts: Use your $18,000 annual exclusion for each family member. A couple can give $36,000 per recipient per year. This strategy works best when started early, as the cumulative effect over many years can be substantial.
Pay Medical and Education Expenses: Direct payments to schools and medical providers don't count as gifts at all. These payments can be unlimited in amount and don't affect your annual exclusion or lifetime exemption.
Consider Life Insurance: Life insurance owned by an irrevocable trust can provide cash to pay estate taxes without being part of your taxable estate. This strategy requires careful planning and professional guidance to implement correctly.
Use Trusts: Various trust strategies can help reduce estate taxes while providing for your family. From simple revocable trusts to complex irrevocable structures, the right trust can provide significant tax and non-tax benefits.
When to Get Professional Help
You should talk to an estate planning attorney if:
- Your net worth is approaching $10 million
- You own a business
- You have complex assets like art or collectibles
- You're married to a non-U.S. citizen
- You want to make large gifts to family
- You're concerned about the 2026 exemption sunset
Don't wait until it's too late. Good estate planning takes time and often involves strategies that work best when implemented years before death. The most effective estate tax planning strategies often require a long-term perspective and regular updates as laws and family circumstances change.
The Bottom Line
Most California families won't pay estate taxes under current law. But if you might be affected, planning ahead can save your family hundreds of thousands or even millions of dollars. The key is understanding both the current rules and the potential changes coming in 2026.
The estate tax isn't something to panic about, but it's worth understanding. Work with professionals who understand both federal tax law and California's unique rules to create a plan that works for your family. Remember, estate planning isn't just about taxes - it's about ensuring your wishes are carried out and your loved ones are protected.
