When planning for the future, it is essential to consider the potential impact of estate taxes on your assets and your beneficiaries. The California estate tax is a complex and often misunderstood topic that can have significant financial implications for your estate. The team at McCunn Law aims to provide you with a thorough understanding of the California estate tax, so you can make informed decisions about your estate and the future of your loved ones.
California Estate Tax
It is critical to note that California does not have an estate tax. However, there is a federal estate tax that may apply to estates of certain sizes. The federal estate tax exemption amount for 2023 is $12.92 million per individual. It is also possible that California could enact its own estate tax in the future, although there has not been any recent legislation to suggest that this is likely.
Applicable Exemptions and Deductions for Estate Tax
The federal estate tax is a tax on the transfer of wealth that is assessed on the value of an individual’s estate at the time of their death. Since there is no estate tax in California, only exemptions and deductions for federal estate taxes need to be considered. Some of the most common exemptions and deductions include:
- Estate tax exemption. As discussed above, for deaths occurring in 2023, the federal estate tax exemption is $12.92 million per individual. This means estates valued at less than $12.92 million will not owe federal estate tax.
- Marital deduction. This deduction allows you to transfer an unlimited amount of property to your spouse free of the federal estate tax. This deduction can be used to defer estate tax until the surviving spouse dies.
- Charitable deduction. The charitable deduction allows individuals to deduct the value of any property or money that they leave to qualified charitable organizations from the value of their estate.
- State estate tax deduction. If an individual’s estate is subject to state estate tax, they may be able to deduct a portion of that tax from their federal estate tax liability.
- Family business deduction. The family business deduction allows eligible estates to reduce the value of a qualifying family-owned business by up to 20% for estate tax purposes.
- Annual gift tax exclusion. The annual gift tax exclusion allows individuals to gift money up to a certain amount to other individuals without incurring gift tax or reducing their estate tax exemption. For gifts made in 2023, the annual gift tax exclusion is $17,000 per person.
These exemptions and deductions can be complex, and it’s a good idea to consult with an estate planning attorney or tax professional to understand how they apply to your specific situation.
Estate Taxes and Estate Planning
For Californians with large estates, the federal estate tax can result in a substantial tax liability that can eat into the value of the estate and reduce the amount of wealth that can be passed on to heirs. As a result, estate planning for Californians with significant assets often involves strategies to minimize or eliminate estate tax liability, such as:
- Gifting. One strategy for reducing estate tax liability is to make gifts during your lifetime. The annual gift tax exclusion allows you to give up to $17,000 per year to an unlimited number of individuals without incurring gift tax.
- Trusts. Trusts are a common estate planning tool that can be used to minimize estate tax liability. Irrevocable life insurance trusts (ILITs), qualified personal residence trusts (QPRTs), and grantor retained annuity trusts (GRATs) are just a few examples of the types of trusts that can be used to transfer assets to heirs while minimizing estate tax liability.
- Business succession planning. Strategies such as family limited partnerships (FLPs) and qualified small business stock (QSBS) can be used to transfer ownership of a business to heirs while minimizing estate tax liability.
Working with an experienced estate planning attorney or tax professional can help ensure your estate plan is designed to maximize your wealth transfer goals while minimizing your estate tax liability.
Q: Which States in the U.S. Have a State-Level Estate Tax?
A: The states that still have a state-level estate tax in 2023 are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
Q: Do I Need to File a CA Estate Tax Return?
A: California does not have a state-level estate tax, so if you are a California resident or own property in California, you do not need to file a California estate tax return. However, if you are a California resident or own property in California and your estate is subject to the federal estate tax, you will need to file a federal estate tax return.
Q: Do Most People in CA Have to Pay an Estate Tax?
A: Some Californians may still be subject to the federal estate tax if their estate is valued above the federal exemption amount, which is currently $12.92 million per individual as of 2023.
Q: What Are the Requirements for Paying Estate Tax?
A: When an estate is subject to federal estate tax, the executor or personal representative of the estate is responsible for filing a federal estate tax return and paying any estate tax owed. Here are some of the requirements for paying the estate tax:
- Determine the value of the estate.
- File a federal estate tax return.
- Pay the estate tax.
- Obtain a tax ID number.
Estate tax laws and regulations can be complex, and the requirements for paying estate tax can vary depending on the specific circumstances of the estate.
Learn More About Keeping Your Family and Hard-Earned Assets Protected
If you need estate planning services, our experienced estate planning lawyers at McCunn Law can help you protect your assets, plan for the future, and ensure your wishes are carried out after you are gone. Contact us today to schedule a consultation and learn more about how we can help you with your estate planning needs.