One of the goals of estate planning is to minimize taxes due. Is there an estate tax in California? The short answer is no. California does not have an estate tax. However, that doesn’t mean that your entire estate will pass through the way you intended totally tax free. Let’s look at some of the ways that your estate may be affected by taxes.
Part of Your Estate is Located Outside of California
If you own assets in another state besides California, your estate may be subject to any estate tax (also known as a death tax) that particular state has in place. For example, let’s say that you own a vacation home in Maine. The value of the home, and any other assets you have there, would likely be subject to their estate tax. For an estate tax to apply, your estate generally must be worth a certain amount as set by the laws in the state.
Some states have what is known as an inheritance tax. An inheritance tax is the amount of money paid in taxes when someone inherits property or money worth a minimum amount. Some states, like Washington, have an exemption of a little more than $2,000,000. However, other states, like Iowa, have no exemption.
This highlights the importance of proper estate planning and determining how you will handle property outside of the State of California. An estate planning lawyer can explain your options to you.
Federal Estate Tax
Everything you own, minus certain deductions you can make from your gross estate, determine what amount the federal government may tax. According to the IRS, most small estates won’t be taxed. However, if the estate’s gross assets and its estate tax return is $11,180,000 or greater, it may be subject to the federal estate tax. Assets must be valued at market prices on the date of death.
How Can You Avoid Estate Taxes?
The goal of creating an estate plan is to reduce or eliminate estate taxes. Some of the most common ways this is done includes:
- Giving tax free gifts. The amount you may give generally changes when tax laws change. In 2018, the limit is $15,000. If you give past that limit, the amount will be subject to a gift tax depending on to whom you’ve presented the gift.
- Create a trust. Transferring assets into a trust and naming your heirs as the beneficiaries of the trust can greatly reduce the tax burden.
Make sure that you talk with an estate planning lawyer to learn about which methods will work best for your particular situation!