If you live in California, you likely know it is one of the highest-taxed states when it comes to income taxes; there is some good news for those worried about estate taxes. California is part of the 38 states that don’t impose their own estate tax on inheritances. Keep in mind; that this does not necessarily mean that your inheritance will be tax-free. Keep reading as Financial Planner LA explains what you need to know about inheritances and estate taxes in California.

By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™

The California Estate Tax

Regardless of the size of the estate, the Franchise Tax Board (think the IRS for the state of California) will not levy any estate taxes on the inheritance. We are just talking at the state level; the Federal Government has its own estate tax rules.  

There may be other taxes due at the state level for those inheriting assets, investments, retirement accounts, or real estate. But these are not technically estate taxes.

What Is the Estate Tax?

The estate tax is just what it sounds like a tax levied on the estate when a person passes away before the estate is passed on to the heirs and beneficiaries. Sometimes the estate tax is called the “death tax.” At the federal level, the estate tax only applies to large estates, regardless of which state you live in. Estate taxes vary from state to state.

^{The California Inheritance Tax and Gift Tax}

As I previously mentioned, there is no inheritance tax in California, regardless of net worth. This is huge for my California financial planning clients. If you are going to receive an inheritance from someone who lived in a state other than California, talk with your fiduciary financial planner to check the estate tax laws affecting your inheritance there. No California estate tax means you get to keep more of your inheritance.

California does not levy a gift tax. However, the federal gift tax does still apply to residents of California. For 2023, the annual gift-tax exclusion is $17,000 per donor, per recipient. A giver can give anyone else—such as a relative, friend, or even a stranger—up to $17,000 in assets a year, free of federal gift taxes.

Federal Estate Tax

You will often hear me talk about how California is a high-tax state; I am a Los Angeles Financial Planner, after all. All the same, federal tax rates are typically higher than state taxes. California tops out at 13.3% per year, whereas the top federal tax rate is currently 37%. 

Even though California won’t ding you with the “death tax,” there are still estate taxes at the federal level to consider. The federal estate tax goes into effect for estates valued at $12.92 million and up, in 2023, for singles. The estate tax exemption is a whopping $25.84 million, per couple, in 2023. Paying estate taxes is quite painful for those who are fortunate to have estates large enough to get hit with the estate tax. With proper tax planning and estate planning, you could potentially pass an estate much larger than this without being subject to the federal estate tax.

For estates that exceed this amount, the estate taxes start at 18% and goes up to 40%. Please ensure your financial advisor offers tax planning if you are receiving a large inheritance. Not doing this is just too expensive.

Related: How To Avoid The $10,000 SALT CAP from the Trump Tax Plan

Overall California Tax Picture

If you inherit a retirement account or pension, withdrawals will be fully taxable. This will likely mean you will have to pay Federal Taxes and California Taxes on your withdrawal from an Inherited Retirement Account. (There are some strategies to minimize the taxes due on inherited IRAs). California does not tax Social Security benefits, which is good; many states do.

California sales tax rates range from 7.35% to 10.25%. This base rate is the highest of any state. California is quite fair when it comes to property taxes when you look beyond the sky-high housing prices in Los Angeles and most of the state. Property taxes in California are not as burdensome, as the average rate is just 0.75% – the 15th-lowest in the nation. When you add in other local taxes based as part of your property tax bill, much of California is hit with a 1.25% property tax bill. Thanks to Prop 13, this amount can only increase 2% per year, which means many Californian homeowners are paying taxes on values much lower than their current estimated values.

No California estate tax is great news. Another piece of good news for California taxpayers is voters passed Prop 19, making it easier to transfer your property tax base to a new home in retirement.

DAVID RAE, CFP®, AIF® is a Los Angeles retirement planner with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over a decade. He is a regular contributor to  Forbes.com, the Advocate Magazine, Investopedia, and Huffington Post. Follow him on Facebook or via his website www.davidraefp.com

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