Estate Tax Planning in California
Avoid or Minimize Transfer Taxes on Your Assets
Historically, the federal estate tax has been imposed on the transfer of wealth at death. More precisely, it is part of a federal transfer-tax system governing certain transfers of property during life and at death. There are three principal components of the federal wealth transfer tax system: (1) estate tax, (2) gift tax, and (3) generation-skipping transfer tax.
For individuals and families with substantial estates, careful planning can reduce or eliminate unnecessary transfer taxes and is an important component of comprehensive estate planning.
The Tax Cuts and Jobs Act of 2017 substantially increased the federal estate, gift, and generation-skipping transfer tax exemptions beginning in 2018. Subsequent federal legislation enacted in 2025 established a new $15 million basic exclusion amount for 2026, with inflation adjustments beginning after 2026.
The Law Office of Maureen Lyons, PC advises clients regarding estate, gift, and generation-skipping transfer tax considerations as part of comprehensive estate planning.
Federal Estate Tax Exemption
Federal law permits an individual to transfer a substantial amount of property free of federal estate tax.
The federal estate tax exemption was $5.49 million per individual in 2017 and increased significantly beginning in 2018 under the Tax Cuts and Jobs Act. For individuals dying in 2026, the federal basic exclusion amount is $15 million per individual.
For married couples, proper planning may allow both spouses’ exemptions to be utilized, potentially sheltering as much as $30 million in 2026 from federal estate tax. However, the availability of both exemptions is not automatic. Depending upon the planning used, preservation of the deceased spouse’s unused exemption may require a timely federal estate tax return and portability election. See “Portability” below.
The maximum federal estate tax rate on taxable transfers above the available exemption remains 40%.
Lifetime Gift Tax Exemption and Annual Gift Tax Exclusion
The federal estate and gift tax systems are unified. In general, taxable gifts made during a person’s lifetime use a portion of the same basic exclusion amount that would otherwise be available to shelter transfers at death.
Accordingly, for 2026, an individual has a $15 million basic exclusion amount for federal gift and estate tax purposes. To the extent that the exclusion is used to shelter taxable lifetime gifts, less of the individual’s basic exclusion amount generally remains available at death.
In addition to the lifetime exemption, federal law provides an annual exclusion from gift tax for qualifying gifts. Gifts that qualify for the annual exclusion generally do not reduce the donor’s lifetime estate and gift tax exemption.
How Much Is the Annual Gift Tax Exclusion?
For 2026, the annual gift tax exclusion is $19,000 per recipient.
Thus, an individual may generally give as much as $19,000 to each of any number of recipients during 2026 without using any portion of the individual’s lifetime gift and estate tax exemption, provided the gifts qualify for the annual exclusion.
Because each spouse has a separate annual exclusion, a married couple can potentially transfer $38,000 per recipient in 2026 without using either spouse’s lifetime exemption.
Special rules apply when spouses elect to treat gifts made by either spouse as having been made one-half by each spouse—a technique commonly referred to as “gift splitting.” Gift splitting generally requires the filing of a federal gift tax return, IRS Form 709, and the consent of both spouses.
The annual exclusion applies only to qualifying gifts, generally gifts of a present interest. Certain gifts made in trust or subject to restrictions may not qualify for the annual exclusion without additional planning.
Generation-Skipping Transfer Tax Exemption
The federal Generation-Skipping Transfer Tax, commonly called the GST tax, is a separate transfer tax that can apply to certain transfers to individuals two or more generations below the transferor.
A common example is a transfer from a grandparent to a grandchild. The GST tax can also apply to certain transfers to unrelated individuals who are more than 37½ years younger than the transferor.
The GST tax is designed to prevent federal transfer tax from being avoided by transferring substantial wealth across one or more generations.
For 2026, the federal GST exemption is $15 million per individual. The maximum GST tax rate is 40%.
Although the GST exemption is currently equal to the basic estate and gift tax exclusion amount, it is a separate exemption and is subject to its own allocation and reporting rules. Careful allocation of the GST exemption can permit substantial wealth to remain in trust for children, grandchildren, and later generations without the imposition of GST tax at each generational level.
“Portability” Between Spouses
Federal law permits a surviving spouse, under certain circumstances, to use the unused federal estate and gift tax exemption of a deceased spouse. This concept is known as “portability.”
The unused amount is referred to as the Deceased Spousal Unused Exclusion amount, or DSUE.
Portability can allow a married couple to preserve the benefit of both spouses’ federal estate tax exemptions without relying exclusively upon traditional A-B or bypass trust planning. Portability, however, is not automatic.
To elect portability, the executor of the deceased spouse’s estate generally must file a federal estate tax return, IRS Form 706, even when the estate is otherwise too small to require an estate tax return. Form 706 is generally due nine months after the date of death. An automatic six-month extension of time to file may be obtained by timely filing Form 4768.
For certain estates that were not otherwise required to file an estate tax return and missed the original portability deadline, IRS procedures may permit a late portability election. Under current IRS procedures, qualifying estates may be able to file Form 706 to elect portability on or before the fifth anniversary of the decedent’s death.
Portability can be extremely useful, but it does not eliminate the need to consider trust planning. Among other limitations, the GST exemption is not portable between spouses. Consequently, a married couple relying solely on portability cannot preserve the deceased spouse’s unused GST exemption for the surviving spouse.
There may also be significant non-tax reasons for using trust planning rather than relying exclusively on portability, including:
- protecting assets for children or other intended beneficiaries;
- planning for blended families;
- protecting assets from a surviving spouse’s later remarriage or changed estate plan;
- creditor protection;
- management of assets in the event of incapacity; and
- preserving assets for future generations.
The appropriate approach depends upon the family’s assets, objectives, beneficiaries, and tax circumstances.
If you are concerned about how federal estate, gift, or generation-skipping transfer taxes may affect your estate plan, we encourage you to book a call.
California Estate and Inheritance Taxes
California currently imposes no estate tax or inheritance tax on transfers arising from the death of a person dying after December 31, 2004.
Historically, California imposed what was commonly called a “pick-up” estate tax, based upon the credit for state death taxes formerly available against the federal estate tax. When the federal credit for state death taxes was eliminated, California’s corresponding estate tax ceased to apply to subsequent deaths.
Although California currently does not impose a separate estate or inheritance tax, a number of other states impose their own estate taxes, inheritance taxes, or both. These taxes can become relevant when an individual owns property in another state, moves from California to another state, or expects to inherit property from a resident of another state.
Individuals with substantial estates or multistate property should consider both federal and applicable state transfer-tax laws when developing or reviewing an estate plan.