California Estate Tax 101

California estate taxes

What is Estate Tax?

When a loved one dies and his property transfers to you, the federal government requires that as the receiver, you pay an estate tax on its gross value. This property typically includes real estate, stocks, cash, life insurance and other assets including property in joint tenancy. The tax payout happens before the remaining assets and property are distributed to the beneficiaries.

However, only about 2 percent of the U.S. population is subject to paying this tax. It is only applied to property and assets valued more than $5.45 million for a single person and $10.9 million for a married couple at a rate of 40 percent (as of 2016). Property and assets transferred to a spouse is exempt from estate taxes. This is called a marital deduction, and there isn’t a limit on the value that can be transferred.  

California Estate Tax

California, like most states, does not collect an estate tax. It was phased out in 2005 as part of the Economic Growth and Tax Relief Reconciliation Act and again denied reinstatement in 2011 because of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. California law also prohibits legislators from re-enacting its estate or pick-up tax without voter approval.

If you have specific questions about you or your spouse’s assets and property in regards to estate taxes, a tax or probate attorney can help. In the meantime, here is some general information regarding estate taxes in California.

Portability Rules

The federal portability rule allows the deceased spouse’s unused estate tax exemption to be transferred to the surviving spouse without worrying about inflation adjustments. This amount is then transferred to the surviving spouse’s exemption so he or she can apply both exemptions for when he or she passes.

The requirements for portability are:

  • It is not available if either spouse is a nonresident alien
  • The deceased and surviving spouse had to be legally married
  • The death must have happened after Dec. 31, 2010
  • An election to use portability had to be made on the decedent’s estate tax return
  • It only applies to the surviving spouse and no other family members
  • It is for both estate and gift tax purposes
  • It doesn’t apply to the generation skipping tax

You can reduce or eliminate a portion or all your estate taxes in three ways:

  1. Use both estate tax exemptions if you are married
  2. Sell off or get rid of your estate’s assets before you die
  3. Purchase life insurance that will replace your assets given to charity

Estate vs. Inheritance Taxes

Without truly understanding the differences, many believe estate and inheritance taxes are one in the same. The key difference between the two is the person responsible for paying them.

Estate taxes are based on the total value of the decedent’s property and assets and paid to the government before the beneficiaries receive their share. Once the estate’s executor divided and distributed the remaining assets and property, the inheritance tax takes over. This is calculated separately for each beneficiary, who in turn must pay an inheritance tax.

However, like estate taxes, California does not have a state-level inheritance tax, nor is there one on the federal level. Yet, the state does have other tax-related situations that affect beneficiaries. For instance, some of the money that may be gifted from a descendent may be taxed:

  • If the money received should have been collected and had taxes paid on it. If an individual dies before they are able to pay taxes, those fees are taken out of the inheritance
  • If an individual perishes outside California, but the beneficiary lives inside the state, the benefactor’s state will tax this inheritance.

Estate Tax Penalties

There are penalties incurred for those who pay their estate taxes late, undervalue the assessment or fail to file a tax return on time. The IRS can impose penalties for both late payment and late filing unless the filer can show reasonable cause for the delay. There are also steep penalties for attempting to evade paying the tax altogether.

You can file an explanation called a reasonable cause determination if you have a valid reason as to why you filed late or underpaid. The worst you can do is purposely understate the value of your assets. The penalty can range from 20 percent to 40 percent of the tax you owe.

Preparing For The Future

Understanding how estate taxes operate can help you better plan for your future. If you have more more questions about how you can plan ahead for your family and loved ones, contact Grace for more information.


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