Are you a California resident seeking to maximize your wealth, protect your loved ones, and minimize taxes through effective estate planning? With 2025 ushering in the final year of high federal exemptions, estate planning has never been more crucial.
California Estate Tax: This blog explores innovative, legally approved strategies—like lifetime gifting, trusts, and step-up in basis—to help families in California preserve the value of their estates.
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Why does tax planning matter?
Tax planning is a crucial part of Estate planning in California, given the rapid changes in the tax environment. Making key decisions while there are higher exemption limits could save you millions. Tax planning helps you pass on the maximum worth of your assets by reducing your tax liability and staying compliant with the IRS guidelines when it comes to estate planning.
This article covers the absolute essentials of California Estate Tax for the upcoming year, 2026
Tax planning helps minimize tax liability by utilizing the right deductions and maximizing savings. A tax plan helps keep penalties and interests at bay, helps plan for financial moves, and prepares for changes. For instance, the federal estate tax exemption is set to shrink in 2026; 2025 is a critical year for high-net-worth individuals to act.
Poor planning results in higher tax liability, unexpected tax bills, and IRS audits, making estate tax planning a necessity to protect your assets from value erosion due to preventable errors. The need is more pressing, especially in 2025, with potential policy changes on the horizon.
What are the Key Elements/documents of Estate Planning?
1. Will: Your Last Will & Testament specifies who your legal heirs are and what each of them is due to receive. It also names a trusted executor to manage the estate and designates guardians if there are minor children. The will is essential even if your estate is small.
2. Trusts: You could deposit funds into Revocable or Irrevocable trusts. While a revocable trust helps you bypass probate and allows flexibility during your lifetime, an irrevocable trust is used explicitly for tax planning, asset protection, and Medicaid planning. Common strategies you could adopt are
- SLATs – Spousal Lifetime Access Trusts
- GRATs – Grantor Retained Annuity Trusts
- ILITs – Irrevocable Life Insurance Trusts
3. Power of Attorney (POA): A legal document that grants someone of your choosing the authority to act on your behalf if you’re incapacitated; it remains valid if you become mentally unable to make decisions.
4. Healthcare Directives states your wishes for medical care if you’re unable to communicate. It names a healthcare proxy to make medical decisions on your behalf.
5. Beneficiary Designations: Not all assets need a Will. Assets like retirement accounts, life insurance, and bank accounts can pass directly to beneficiaries without a will or trust.
6. Letter of Intent: Although not a legal document, this letter explains your wishes, like funeral arrangements, personal messages, and guidance for heirs.
7. California Estate Tax Planning: The federal estate tax exemption is $13.99 million per individual taxpayer. If your estate exceeds this, you may owe up to 40% in federal taxes. Strategies to bring your taxable estate down include:
- Lifetime gifting within the exemption
- Charitable donations &
- Creating Trust-based structures
8. Business Succession Planning: There are a few things as important as designating the successor to your business, or deciding if the entity will be sold or transferred.
9. Digital Assets Planning: This is a recent addition to the list; you ought to specify how to manage online accounts, digital files, crypto assets, and passwords. Cryptocurrency and digital wealth are now common and require precise planning.
10. Regular Reviews & Updates, the Laws and the tax environment keep changing. Your life circumstances may also change with significant life events like marriage, a windfall inheritance, or children. Review and update your plan every 2-3 years.
What are the tax implications of estate planning in the state of California?
There is no specific inheritance tax in California, unlike some other states, such as Pennsylvania or Iowa, which have inheritance taxes. However, the Federal estate tax is charged on the value of a person’s estate when they pass away.
As of 2025, the estate tax exemption is $13.99 million per person and $27.98 million for married couples.
Any amount above this threshold may be taxed at up to 40%.
Read more about California’s inheritance tax & strategies to manage it.
Role of Capital Gains in Estate Planning in California
Capital gains tax comes into play when beneficiaries square-off inherited real-estate properties. Here’s how: the Step-Up in Basis Rule comes into play.
When someone inherits an asset, its tax basis is “stepped up” to the asset’s value at the date of death. This effectively reduces or eliminates capital gains tax when the asset is later sold.
Profitjets on – Things to Check Off Your List Before 2026
Here’s what Profitjets, a tax expert on California Estate Tax, would like to keep you informed about-things to check off your list before 2026
Understand the tax environment in your state, California does not impose its own inheritance or estate tax as of 2025. You are liable to pay Federal taxes if your estate exceeds $13.99 million per individual or $28 million per couple (married filing jointly)
Major federal changes are predicted for 2026. The above exemption is temporary. Soon, the estate tax threshold will drop to an estimated $6–7 million, exposing more estates to federal tax. It’s time you plan your estate in 2025 to lock in high exemptions.
You could start by gifting strategically, when the lifetime gifting is exempt $17,000 per recipient in 2025.
We also recommend setting up Irrevocable Trusts, SLATs, or GRATs to move assets out of your taxable estate while retaining some control. Trusts could protect wealth from creditors, taxes, and mismanagement as well.
You have to begin to account for Real Estate & Business Interests, owing to high property values in California. Evaluating how homes, investment properties, and businesses affect your estate and how to structure them requires professional help.
Estate planning in the U.S. in 2025 is more important than ever, especially with expected tax changes on the horizon. A comprehensive estate plan ensures that your assets are managed, protected, and distributed according to your wishes, i.e., with minimal tax liability, legal conflict, or court involvement.
Why is a Tax Professional crucial for Estate planning, specifically the California Estate Tax?
A certified and experienced tax expert, Interprets Complex Tax Laws, especially those with changing legislation. They help avoid costly tax errors (mistakes that could result in IRS penalties and unnecessary audits) and craft a professional and personalized plan to minimize the value of your tax liability during estate planning and preserve the worth of the assets being passed on to heirs. Not only are tax experts excellent tax planners, they are qualified to collaborate with estate attorneys, making your legal and financial representation a fool-proof plan for seamless succession without erosion of estate value.
Conclusion
The window to act under the current generous exemption closes in 2025. Thoughtful planning, with the help of the right tax expert, this year could save your heirs millions in taxes, especially if you are a resident of a high-asset state like California. Here’s where Profitjets can make a difference: Our expert team handles tax planning and tax compliance seamlessly. We also provide outsourced bookkeeping and accounting, and tax services to meet your accounting needs. We have over 15 years of experience and a track record of over 600 satisfied customers who stand testament to our proficiency and accuracy.
FAQs on California Estate Tax
1. What is the difference between a will and a revocable living trust?
A Will Is a legal document that outlines how your assets should be distributed and names guardians (if you have minors). However, it goes through probate, which makes it public. Whereas a revocable living trust, on the other hand, lets you retain control during your life, avoids probate, and keeps your affairs private.
2. How much can I gift each year without reducing my estate tax exemption?
In the year 2025, you can gift up to $17,000 per person annually (or $34,000 per couple) free of any tax obligations. These gifts don’t count against your $13.99 million lifetime exemption, making it an effective way to reduce your taxable estate gradually.
3. What is a “step‑up in basis,” and why does it matter?
When you inherit a real estate asset, the value is “stepped up” to the market price on the date of the donor’s death. This often eliminates capital gains tax when heirs sell the asset soon after inheriting it.
4. Does California have an Estate Tax?
No—California has no state estate or inheritance tax as of 2025. Only the federal estate tax applies, and then only if your estate exceeds the high exemption threshold.
