California Estate Tax

Is There a Death Tax or Estate Tax in California? Proposed California Estate Tax for 2020 Did Not Make Ballot. 2022 Federal Estate Tax Threshold Explained. 2022 Estate Tax Exemption Increased to $12.06 Million for Individuals, $24.12 Million for Couples.

A death tax or an estate tax is a special, one-time tax levied by the United States on an estate, based on that estate’s total value at the time of death. It is, however, levied only if that total value exceeds a certain threshold set by law. An estate tax strategy is an essential part of estate planning. States are free to impose their own death tax, inheritance tax or estate tax – and many do. California does not have a state estate tax, but residents are still subject to the federal tax.

Estate taxes have always been a hot-button issue. Some say it’s like taxing people twice on the same money—once when they earn it and then again when they die. Others say it punishes people for doing well in life. Then of course, there is the argument that being taxed for dying just seems patently unfair.

To add insult to injury, the final tax bill usually comes due just nine months after a loved one’s death, which means a grieving family has to pay estate taxes just around the time people stop bringing over casseroles.

Aside from any moral arguments one could make against death taxes or estate taxes, the laws around which they are established are constantly changing. State-level death taxes, inheritance taxes and estate taxes, where they exist, can also be very different from federal estate tax laws, making the subject very difficult for the layperson to understand.

That said, if you are subject to Death Taxes and Estate Taxes, they can be incredibly high—as much as 40% in some cases. Plus, State death taxes of up to half the federal amount – another 20%!

So What Is the Death Tax or Estate Tax in America?

Technically speaking, the federal estate tax, or “death tax” as it is often called, to paraphrase the government, “a tax on your right to transfer property at your death.”

You’re probably thinking, “What does that mean? I understand the IRS taxing my income or my property, but the IRS can tax my rights!?!”

Well, yes. In plain English, the government is taxing you for the act of passing your assets on to your heirs, probably because if they weren’t passed on to someone, your assets would be “escheated,” which is a fancy way of saying the state in which you live would be the beneficiary.

How Do Death Taxes and Estate Taxes Work?

State and federal laws vary, but the general idea is that only estates valued at or above certain amounts are subject to estate taxes. This is true on both the state and federal level.

The amount an estate must be worth to incur estate taxes is called the threshold. This amount is also referred to as an exemption.

For example, if you live in a state where the threshold for estate taxes is $5 million and your estate is worth $4 million, your estate is not subject to any estate taxes on the state level.

If in that example your estate is worth $6 million, your estate is subject to estate taxes on the state level.

What Is the Federal Estate Tax Threshold?

For 2022, the threshold for the federal estate tax is presently $12.06 million for individuals, $24.12 million for married couples, plain and simple. This was increased from the 2021 levels.

Again, the federal estate tax rate can be as high as 40%. State death, inheritance and estate taxes can be 20%.

Depending on the political winds, those numbers may change significantly.

Are you afraid of hitting these thresholds and facing high taxation on your estate? CunninghamLegal offers a comprehensive Tax Planning Service for High Net-Worth Families to ensure you are taking advantage of all legal options in protecting yourself and your loved ones from excess taxation.

What’s the Difference between Death Taxes, Estate Taxes and Inheritance Taxes?

For our purposes here, Death Taxes and Estate Taxes are interchangeable. But there is a difference between a death tax or an estate tax and an “inheritance tax.”

Death taxes and estate taxes are incurred by the estate of the person who died, and are based on the gross value of the entire estate at the time of death.

Inheritance taxes are other specific taxes incurred by the person who inherited part or all of an estate. As of this writing, only six states levy a specific inheritance tax: Maryland, Iowa, Kentucky, Nebraska, New Jersey, and Pennsylvania.

How much is the inheritance tax in California? There is no inheritance tax here. That’s not to say that beneficiaries of estates may not otherwise incur taxes as an indirect result of inheriting money—for example, when they cash in an IRA—but that is a separate subject.

What States Have Death Taxes and Estate Taxes?

Just as you pay separate state and federal taxes each year, state and federal death taxes and estate taxes are also two separate things.

Not all states have their own death taxes and estate taxes. In fact, as of this writing, only twelve states plus the District of Columbia impose death taxes or estate taxes. Each of those states has a completely different set of laws about how those death and estate taxes work, different threshold levels, and different tax rates.

For example, at this writing, the threshold in the state of Washington is $2.193 million, with death and estate tax rates of between 10% – 20%.

New York State has a threshold of $5.85 million, with death and estate tax rates of between 3.1% – 16%.

And if you’re thinking of moving, consider staying away from Maryland, which has both a death tax and an inheritance tax!

Does California Have an Estate Tax?

As of this time in 2022, California does not have its own state-level death tax or estate tax, and has not had one since 1982, when it was repealed by voters. That may change, however, in the future.

In 2019, a bill (then labeled S.B. 378) was introduced to levy a new California estate tax, and for a time it appeared to have legs—and at one point it was expected to appear on the 2020 ballot. But it has so far failed to receive a floor vote. This measure would have imposed a new California Estate Tax or “CA Death Tax” on estates larger than $3.5 million (for individuals). If eventually passed, the revenue collected from these taxes would be expected to reach as much as $1 billion annually.

As originally designed, new 2020 California estate taxes would have phased out once an estate hit the current federal level requirement to avoid double taxation.  In other words, under the proposed legislation, if an estate in California met the federal threshold, it would not also pay the California estate tax rate, just the federal estate tax.

As of this writing, however, the bill is on ice. Regarding a separate inheritance tax, California has no such thing. Be suspicious of anyone saying they will save you from “the California Inheritance Tax” or “California Death Tax” or get you a “California Estate Tax Exemption 2020” For now, no specific death tax, California specific.

How Do I Know If a Death Tax or an Estate Tax Will Affect Me?

If you live in California, and you are presently subject only to the Federal estate tax, you might be thinking it won’t affect you if your estate isn’t worth $12.06 million for an individual or $24.12 million for a couple.

But here we need to discuss what constitutes an “estate.” The short answer is: everything. The whole kit and caboodle!

The government will require a tabulation which includes your house, assets, trusts, annuities, business interests, your car, your baseball card collection, your Star Wars action figures, those sweatpants you won’t throw out, your…OK, they might let the sweatpants go, but the bottom line is…

Your death taxes and estate taxes are based on the total value of every single thing you own or have an interest in at the time of your death. That total is called the “gross estate.”

Why is this important to understand? Because you might think of the value of your estate as just the value of your major assets, when, in fact, it is the value of everything.

And as we often say here at CunninghamLegal: everything eventually sees the light of day.

What Strategies Can Avoid Death Tax and Estate Tax?

Thankfully, even for those with large estates, there are ways to reduce or even avoid death taxes and estate taxes, but it takes real know-how, experience, and a super-solid understanding of constantly changing laws and decisions at both the state and federal levels. Only a savvy attorney can help you make the death tax and estate tax laws work for you and ensure you leave the best possible legacy for your heirs—including indirectly incurred income taxes, like from IRAs and retirement accounts.

To learn more, read our extensive article on Advanced Tax Planning for High Net-Worth Families or contact us to ensure you are taking advantage of all legal options in protecting yourself and your loved ones from excess taxation.

What Is a Portability Election for Death and Estate Tax Exemptions?

Let’s look at a big “freebie” and an important strategy for avoiding death taxes and estate taxes: “portability,” which refers to the portability of death tax and estate tax exemptions under Federal Law, which we’ll break down below.

As we learned, every American is entitled to a $12.06 million exemption from federal estate taxes throughout their lifetime. Married couples are allowed a $24.12 million exemption.

This exemption is “portable” for the spouse of the deceased, meaning that when one spouse in a marriage dies, whatever part of their exemption is unused can be used by the other spouse upon their own death...if the “surviving spouse” files the right paperwork with the IRS on time. 

Let’s consider the case of Bob and Sue, a married couple who each have individual estates worth $5 million. Bob dies. Since each of us has a lifetime exemption of $12.06M, that means Bob left $7.06M of unused exemption.

Now, as a surviving spouse, Sue owes no death tax or estate tax on Bob’s money because Sue is a United States citizen. But portability allows Sue to use all or part of Bob’s unused exemption when she inherits $5M from Bob.

But what difference does it make to Sue if she inherits Bob’s money? Sue’s estate is now “only” worth $5M plus Bob’s $5M, totaling $10M. Her own $12.06M exemption will cover it, right?

Sue gets great advice from her lawyer, CPA and financial advisor to file a “portability 706” to claim Bob’s $12.06M “exemption.” Sue was advised to file this Form 706 with the IRS in order to claim the “porting” or transferring over of Bob’s $12.06M “exemption.”

Sue’s neighbor thinks Sue wasted money on hiring the lawyer to help her with the Form 706, but the neighbor is short sighted. Yes, Sue’s estate is worth $10M…now. But let’s say she lives another ten years and in that ten years, that estate grows by another $8M. Now, instead of $10M, that estate is worth $18M at the time of Sue’s death. Sue’s own exemption likely to be about $7M (because the Trump era tax cuts expire on January 1, 2026) kicks in plus the unused exemption that was carried over from Bob ($12.06M). The total amount of Sue’s exemption is $7M plus the$12.06M for a total of $19.06M that can pass tax free to Sue’s beneficiaries and heirs! Without filing portability her exemption would only be $7M leaving $12.06M exposed to taxes with a tax bill likely more than $5 million!

By filing the Portability 706, Sue’s family saves almost $5M in taxes. That’s going to make a very big difference to Sue’s heirs!

How to Get the Portability Exemption?

Remember, there is one catch on portability: it does not just automatically kick in. You must pro-actively elect or choose to carry over what’s left of a deceased spouse’s exemption. You must file a Portability Form 706!

There’s also a time element involved. This form must be filed within five years of the deceased spouse’s death in order for the surviving spouse to be able to take advantage of portability upon their own death. Do consult with a savvy lawyer with experience in this field of practice.

Are There Other Ways, Beyond Portability, to Reduce or Avoid the Estate Tax?

Again, yes, but they are too complex to cover here, and vary greatly by the individual. That’s why it’s so crucial to work with a good estate attorney who knows all the ins and outs of death tax and estate tax laws, keeps up on all the changes, and understands how to use them to their clients’ advantage.

This is going to be even more crucial to Californians if the laws eventually change and the state imposes its own death tax or estate tax, as it has done in the past.

Benjamin Franklin said that only death and taxes were certain in life, but perhaps we can modify his saying, just a bit. Why not let us help you avoid the Death Tax?

What Do We Do?

The lawyers and staff at CunninghamLegal help people plan for some of the most difficult times in their lives; then we guide them when those times come.

Make an appointment to meet with CunninghamLegal for California Estate Planning and Trust Administration. We also offer a robust, overall tax-planning service for high net-worth families. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or book an appointment online.

Please also consider joining one of our free online Estate Planning Webinars.

We look forward to working with you!

Best, Jim

James Cunningham Jr., Esq.
Founder, CunninghamLegal