California State Taxes on Inheritance

Emily received a notice from the California Franchise Tax Board six months after her mother’s death—a demand for over $15,000 in estate taxes, penalties, and interest. Her mother’s estate was far from massive, but a modest growth in a retirement account triggered an unexpected tax liability, wiping out a significant portion of what Emily hoped to use for a down payment on a home. Many Californians mistakenly believe there is no state inheritance tax, leading to insufficient tax planning and unwelcome surprises.

As an Estate Planning Attorney and CPA with over 35 years of experience, I frequently see families caught off guard by California estate tax rules. It’s not a tax on the inheritance itself, but a tax on the estate before distribution. While the federal estate tax threshold is quite high, California’s estate tax, though less common, can still impact estates exceeding a much lower exemption amount. The good news is with proactive planning, we can often minimize, or even eliminate, this burden. As a CPA, I’m uniquely positioned to assess the tax implications, considering the all-important “step-up in basis” and potential capital gains consequences that beneficiaries face.

What is the California Estate Tax?

California imposes an estate tax on the transfer of an estate’s assets when the total value exceeds a specific exemption. For deaths occurring in 2024, the estate tax exemption is $1,284,000. This means estates with a gross value below that amount generally owe no California estate tax. However, this exemption is subject to change, so it’s crucial to stay updated on current thresholds. It’s also important to understand that the exemption is not automatically applied; proper filing requirements must be met even if no tax is due.

How Does the California Estate Tax Work?

The California estate tax is calculated based on the fair market value of the decedent’s estate as of the date of death. This includes all assets owned by the decedent, such as real estate, personal property, bank accounts, investments, and retirement accounts. The tax is progressive, meaning higher estate values are subject to higher tax rates. The rates range from 0.8% to 16% – significantly lower than federal estate tax rates, but still substantial. Unlike federal estate tax, California does not have a marital deduction for estates exceeding the exemption amount. This means the entire value of the estate may be subject to tax, even if it is primarily passing to a surviving spouse.

What About Debts and Liabilities?

When calculating the value of an estate for tax purposes, it’s vital to properly account for debts and liabilities. These include outstanding loans, credit card balances, medical bills, and other obligations of the deceased. California’s mandatory payment order dictates the priority in which debts are paid, as outlined in Probate Code § 11420. Generally, secured debts, like mortgages, take precedence over unsecured debts, like credit card balances. All creditor claims must follow the formal claims system, governed by Probate Code §§ 9000–9399. It’s critical to understand that the statute of limitations for creditor actions is strict – a mere one year from the date of death, per CCP § 366.2, and this deadline is NOT tolled by the probate process.

How Does Spousal Property Affect California Estate Tax?

The treatment of property passing to a surviving spouse can be complex. Property held as community property generally does not trigger estate tax upon the first spouse’s death. However, assets held as separate property do contribute to the estate’s value. California’s spousal liability framework is also important, distinguishing between exposure for community property and a capped statutory liability for the surviving spouse’s separate property debts, as defined in Family Code § 910 and Probate Code §§ 13550–13554. Careful planning regarding property ownership is crucial to minimize potential estate tax liability.

What if the Estate is Small?

For very small estates, California offers simplified procedures to avoid the full probate process, and potentially estate tax filings. As of April 1, 2025, the small estate threshold will be $208,850 as defined in Probate Code § 13100. If an estate falls below this amount, a streamlined process can be used, bypassing many of the formalities of traditional probate. However, even with small estate procedures, it’s essential to ensure proper documentation and compliance to avoid any potential legal issues.

What standards do California judges use to determine a will’s true meaning?

In California, a last will and testament is reviewed under probate standards that focus on intent, capacity, and execution. Clear drafting reduces ambiguity, limits misinterpretation, and helps families avoid unnecessary conflict during estate administration.

• Authority: Define executor responsibilities clearly.
• Guardians: Establish guardianship for minors.
• Location: Confirm domicile requirements.

For California residents, understanding how intent, authority, and compliance interact is one of the most effective ways to protect family harmony and estate integrity. A will that anticipates probate scrutiny is far more likely to be honored as written and far less likely to become the source of unnecessary conflict.

Controlling California Statutes on Estate Debts and Creditor Claims

• Debt Priority:
  
  California Probate Code § 11420
  
  Establishes the mandatory statutory order in which estate debts must be paid before any distributions to beneficiaries.
• Probate Creditor Claims:
  
  California Probate Code §§ 9000–9399
  
  Governs how creditor claims must be formally filed in probate and why informal demands, letters, or invoices are legally ineffective.
• Creditor Lawsuit Deadline:
  
  California Code of Civil Procedure § 366.2
  
  Imposes a strict one-year deadline from the date of death for most creditor lawsuits, which is not tolled by probate proceedings.
• Surviving Spouse Liability:
  
  California Probate Code §§ 13550–13554
  
  Limits a surviving spouse’s personal liability for a decedent’s debts to the value of property received under these statutes.
• Small Estate Threshold:
  
  California Probate Code § 13100
  
  Sets the $208,850 small estate affidavit threshold for deaths occurring on or after April 1, 2025.