One of the main concerns for anyone involved in the estate planning process revolves around the possibility of paying taxes. In addition to an estate tax, many people worry about whether they may be affected by an inheritance tax in California.
Good News: California Doesn’t Have an Inheritance Tax
In fact, there is no estate tax at the state level. It gives a big sigh of relief, doesn’t it? It’s always a peaceful feeling to know that heirs won’t have to pay an inheritance tax when they receive assets from an estate. It improves the likelihood that heirs will be able to keep the assets that were gifted to them through the Last Will and Testament.
Bad News: The Federal Estate Tax Still Exists
While there is no inheritance tax in California, the federal estate tax still exists. Of course, it doesn’t affect every estate. In 2018, the federal estate tax exemption was $5.6 million per individual. This means that if an estate is worth less than $5.6 million, there’s no need to worry about the federal estate tax.
Tips for Estates Subject to the Federal Estate Tax
Estate taxes can be minimized using appropriately chosen estate planning methods. Of course, the best ways to minimize the federal estate tax will depend on your specific circumstances. We’ve put together this basic list of tips for you to read and discuss with your estate planning lawyer.
Surviving spouses may be able to adopt any unused exemption amount. California is a community property state, but individuals can also own personal or separate property. If the deceased uses only $3 million of the exemption claim, that means the surviving spouse could potentially use $7.6 million upon their death. Of course, estate tax exemption laws change on a yearly basis. It’s important to review and discuss the federal exemption on a regular basis.
Married? Use the marital deduction. Individuals who are married can reduce the possibility of a federal estate tax by gifting assets to their spouse. This can be done either before death or through an estate plan. California provides for unlimited marital gifts. These gifts are tax free. However, the spouse must be a citizen of the United States to take advantage of this tip.
Consider a trust designed to minimize estate taxes. There is another federal estate tax known as a generation skipping tax. There are caveats that determine when this sort of tax is assessed. However, there are trusts that can help you leave assets to your grandchildren or future generations that will help you minimize this tax. Assets are distributed to future generations in a specific way. This helps protect the entire amount within the trust from this tax.
Make gifts before death. Instead of leaving your assets to be distributed after your death, you can make gifts during the course of your life. This can reduce the size of your estate which helps minimize the federal estate tax. There are several gifting options to choose from. It’s best, though, to discuss which options are best for you with a lawyer.