TL;DR

There is no California estate tax or California inheritance tax. However, residents must still consider federal estate planning taxes. The main concern is the federal estate tax exemption, which is scheduled to be cut in half in 2026, potentially exposing more families to a 40% tax. Another key issue is the federal gift tax; California residents should know it shares the same lifetime exemption as the estate tax. Understanding these federal rules is crucial for protecting your assets, as the real threat isn’t a state-level tax but a series of complex federal regulations.

Does California Have an Estate Tax or Inheritance Tax in 2025?

It’s the question that keeps countless Californians awake at night, a nagging fear fueled by whispers and misinformation. As you look at the home you’ve worked a lifetime to own and the savings you’ve painstakingly built, you can’t help but wonder: when I’m gone, is the government going to show up and take a massive chunk of it? The confusion surrounding a potential California estate tax or California inheritance tax has created a fog of anxiety for families across the state.

So let’s clear the air and answer the question directly. No, California does not have an estate tax. Furthermore, the state does not have an inheritance tax. You can read that again. The Golden State is one of 38 states that will not tax your estate or require your heirs to pay a tax on the assets they inherit from you.

This news often comes as a wave of relief, but here’s where the story takes a sharp and dangerous turn. While you’ve been worried about a phantom state-level tax, a far greater financial threat has been looming, one that is very real and is about to become much more significant for many families. The myth of the California estate tax has distracted people from the actual tax that could devastate their legacy: the federal estate tax.

With the federal estate tax exemption scheduled to be cut significantly in 2026, understanding how this change may impact your family is more critical than ever. Our team advises on estate planning strategies designed to address these complex tax laws. To discuss your specific situation, call Bay Legal, PC at (650) 668-800, email our team at intake@baylegal.com, or schedule a consultation using our online booking calendar. Our principal office is located at 667 Lytton Ave Suite 3, Palo Alto, CA 94301, United States.

The Real Threat: Federal Estate Tax Exemption

For decades, the federal government has imposed a tax on the transfer of large estates from one generation to the next. However, there’s a crucial protection in place called the federal estate tax exemption. Think of it as a massive coupon that allows you to pass a certain amount of wealth to your heirs completely tax-free. For 2025, this exemption is historically high, sitting at over $13 million per person.

This incredibly high number has made the federal estate tax irrelevant for all but the wealthiest families. It has created a sense of complacency, a belief that estate planning taxes are a problem for billionaires, not for the average California homeowner. But a seismic shift is scheduled to happen at the end of 2025. This high federal estate tax exemption is set to be cut roughly in half.

Suddenly, millions of families who never had to worry about the federal estate tax will find themselves directly in its crosshairs. A couple with a paid-off home in a desirable neighborhood and a healthy retirement portfolio could easily find their estate’s value exceeds the new, lower exemption amount. And the tax is not a small one. The federal government can take a staggering 40% of every dollar over that exemption limit. This is the conversation you need to be having. Forgetting about the non-existent California inheritance tax and focusing on the very real federal tax is the first step toward a more secure financial plan.

Navigating these complex and changing tax laws requires a strategic plan. The team at Bay Legal, PC advises clients on how to structure their estates to address these precise challenges, working to protect your family’s financial future. To understand how the 2026 changes to the federal estate tax exemption might impact you, call our office at (650) 668-800 or schedule a consultation using our online booking calendar.

The Hidden Taxes: Gift Tax California and Capital Gains

The conversation around estate planning taxes doesn’t end with the federal estate tax. Two other areas often catch families by surprise, leading to unexpected financial burdens.

First is the gift tax. California does not have a state-level gift tax, which is another common point of confusion. However, just like the estate tax, there is a federal gift tax. The two are actually linked. The federal gift tax and the federal estate tax share the same lifetime exemption. This means that any large gifts you make during your lifetime that exceed the annual exclusion amount (currently $18,000 per person, per year for 2025) will chip away at your lifetime federal estate tax exemption.

For example, if you give your child $118,000 to help with a down payment, the first $18,000 is covered by the annual exclusion. The remaining $100,000 would then be deducted from your lifetime exemption, reducing the amount you can pass on tax-free when you die. It’s a crucial concept in estate planning taxes that prevents people from simply giving away all their assets on their deathbed to avoid the estate tax. Understanding the rules around the gift tax California residents must follow at the federal level is essential.

The second hidden tax is capital gains. This is arguably the one that impacts the most families, even those with modest estates. When you inherit an asset like a house or a stock portfolio, you receive what’s known as a “step-up” in basis. This means the asset’s cost basis for tax purposes is reset to its fair market value on the date of death. This is an incredible benefit because if your heirs immediately sell the asset, they will pay little to no capital gains tax.

However, many estate plans that are poorly structured, especially those using joint tenancy, can accidentally destroy this tax benefit for at least half of the asset’s value. This can leave a surviving spouse or children with a massive and often avoidable tax bill when they eventually sell the property. While you were worried about a California estate tax, a simple titling mistake could end up costing your family far more.

Structuring an estate plan is more than just deciding who gets what; it’s about transferring your assets in the most tax-efficient way possible. From preserving the step-up in basis to advising on a gifting strategy, our team at Bay Legal, PC is focused on these critical details. To discuss your specific situation, you can email our team at intake@baylegal.com. Our principal office is located at 667 Lytton Ave Suite 3, Palo Alto, CA 94301, United States.

So, while it’s a relief to know that California won’t be sending you a tax bill after you’re gone, the work of protecting your estate is far from over. The real conversation is about navigating the complex web of federal taxes. It’s about understanding that the federal estate tax exemption is not permanent and that decisions you make today about gifting and property titling can have profound financial consequences for the people you love tomorrow.

You’ve spent a lifetime building your legacy. With the laws on the verge of a major shift, the landscape of estate planning taxes is changing rapidly. You now know that the danger isn’t the mythical California inheritance tax, but a series of real financial traps that are easy to fall into without proper guidance.

With the exemption amount set to drop, your family could be facing a tax liability they are completely unprepared for. The strategies that have worked for the past decade may no longer be enough to protect them. The real question is, will your current plan still be standing after the rules change?

A comprehensive approach to estate planning taxes goes beyond the non-existent California estate tax and considers federal gift taxes and capital gains. We advise on the legal structure of your estate plan and collaborate with your tax and financial professionals to help create a cohesive strategy. To begin this conversation, schedule an appointment via our booking calendar, email our intake team at intake@baylegal.com, or call us at (650) 668-800. You can visit our principal office at 667 Lytton Ave Suite 3, Palo Alto, CA 94301, United States.

Frequently Asked Questions (FAQs)

1. Does California have an estate tax?

No. As of 2025, there is no California estate tax. Your estate will not be taxed by the state of California when you pass away.

2. Is there a California inheritance tax for heirs?

No. There is no California inheritance tax. Beneficiaries who inherit your assets will not have to pay a state tax on what they receive.

3. What is the federal estate tax exemption and why is it important?

The federal estate tax exemption is the amount you can pass to your heirs without paying federal estate tax. It is critical because this exemption is set to be reduced significantly in 2026, which will affect many more families’ estate planning taxes.

4. How much is the federal estate tax?

The federal estate tax rate is a flat 40% on any amount that exceeds the federal estate tax exemption limit.

5. Is there a gift tax in California?

There is no state-level gift tax. California residents, however, are subject to the federal gift tax, which is linked to the lifetime federal estate tax exemption.

6. How do estate planning taxes and gift taxes work together?

Federal estate planning taxes and gift taxes are unified. Large gifts you make during your lifetime that are over the annual exclusion will reduce your lifetime federal estate tax exemption, affecting how much you can pass on tax-free at death.

7. If there is no California estate tax, why do I need to plan?

You need to plan for federal estate planning taxes. The changing federal estate tax exemption, capital gains taxes, and federal gift tax are all complex issues that can significantly impact your heirs’ inheritance.

8. What is the biggest tax mistake people make in estate planning?

A common mistake is focusing on the non-existent California inheritance tax while ignoring federal issues like capital gains. Forgetting to account for the “step-up” in basis can lead to a huge and avoidable tax bill for your heirs.

9. Can I gift money to avoid the federal estate tax?

Yes, but within limits. You can use the annual gift tax exclusion to reduce your taxable estate over time. However, large gifts will count against your lifetime federal estate tax exemption, which is a key part of the strategy for managing the gift tax. California has no separate gift tax, so only federal rules apply.

10. Who needs to worry about federal estate planning taxes?

With the federal estate tax exemption set to decrease, anyone with a high-value home and retirement savings could be affected. It’s no longer just a concern for the ultra-wealthy, making it a critical topic for many California families.

Now that you understand the real financial threats are federal estate planning taxes, not a California inheritance tax, the next step is to review your current plan. Our firm can help you get clarity on your potential liabilities and advise on your options. To get started, you can call Bay Legal at (650) 668-800, email us at intake@baylegal.com, or conveniently schedule a consultation through our online booking calendar. The principal office for Bay Legal, PC is at 667 Lytton Ave Suite 3, Palo Alto, CA 94301, United States.

Attorney Advertising Disclaimer

This website and its contents are for informational purposes only and do not constitute legal advice. Prior results do not guarantee a similar outcome. Every estate planning matter is unique and depends on specific circumstances and applicable law. Viewing this site or contacting Bay Legal, PC does not create an attorney–client relationship. If you need legal advice, please schedule a consultation with a licensed attorney.