Estate Tax Planning for California Families

The federal estate and gift tax exemption is $15 million per individual — $30 million for a married couple — effective January 1, 2026. The One Big Beautiful Bill Act made that figure permanent and indexed it for inflation after 2026, removing the scheduled sunset that had driven a decade of planning urgency.

For most California families, that changes the question. Federal estate tax is no longer the primary concern below that threshold. What remains are the issues that never depended on the exemption: property tax reassessment under Proposition 19, basis planning, trust income taxation under California’s unusual residency rules, and the ordinary problem of transferring assets without creating a probate.

We advise families and business owners in Temecula, Murrieta, San Diego, Riverside, and San Bernardino.

The Federal Numbers for 2026

Provision	2026 amount
Estate and gift tax exemption (per individual)	$15,000,000
Married couple, with portability	$30,000,000
Top estate tax rate	40%
Annual gift tax exclusion (per recipient)	$19,000
California state estate tax	None

The exemption is unified — it covers lifetime gifts and transfers at death together. Annual exclusion gifts do not consume it, and neither do direct payments of tuition or medical expenses made to the institution or provider.

Portability allows a surviving spouse to use the deceased spouse’s unused exclusion, but only if a Form 706 estate tax return is filed to elect it — even when no tax is owed and the estate is far below the filing threshold. Missing that election is the most common and most expensive estate tax error we see, because it can forfeit $15 million of exclusion. A simplified late-election procedure exists within a limited window, which is a reason to raise the question early rather than discover it years later.

California Has No Estate Tax — But It Is Not Neutral

California imposes no estate or inheritance tax. That is genuinely favorable and distinguishes California from Oregon, Washington, and much of the Northeast. It is also where most national estate planning content stops, and where the California-specific issues begin.

Proposition 19 and Property Tax Reassessment

For California families, Proposition 19 is frequently a larger financial event than the estate tax.

Before Prop 19, a parent could transfer a residence and up to $1 million of assessed value in other property to a child without reassessment. That is gone. Under current law, the parent-child exclusion applies only to a principal residence that the child then uses as their own principal residence, and even then only to a limited amount of value above the existing assessed value.

The practical effect on a long-held property is severe. A Riverside County home purchased decades ago may carry an assessed value far below market. Inherited by a child who will not live in it — a rental, a second home, a property to be sold later — it is reassessed to current market value, and the annual property tax bill can multiply several times over. For inherited rental and commercial property, the reassessment is essentially automatic.

This changes the analysis for families whose wealth is concentrated in California real estate, which describes a great many of them. Prop 19 planning is separate from estate tax planning and should be addressed on its own terms.

California Taxes Trust Income by Residency

Under Revenue and Taxation Code section 17742, California taxes the income of a trust based on the residence of its fiduciaries and its noncontingent beneficiaries — not on where the trust was created or where its assets sit.

A trust with a California trustee is exposed to California tax on undistributed income even if the settlor and every beneficiary live elsewhere. A trust with a California beneficiary whose interest is noncontingent is exposed on a proportionate basis. Where fiduciaries or beneficiaries are split between California and other states, apportionment rules apply.

This is a genuine planning variable that out-of-state advisors routinely miss, and it is one of the few remaining places where the choice of trustee has direct tax consequence. It also becomes acute when a family member moves into or out of California — the trust’s tax profile changes with them.

Basis Planning Now Matters More Than Exemption Planning

With a $15 million exemption, the calculus has inverted for most families.

Assets included in a decedent’s estate receive a step-up in basis to fair market value at death under Section 1014. Assets given away during life carry over the donor’s basis. For a family below the exemption threshold, aggressive lifetime gifting can be actively harmful — it removes assets from the estate where no tax would have been imposed anyway, and forfeits a basis step-up that would have eliminated decades of unrealized appreciation.

This matters especially in California, where appreciated real estate and closely held business interests dominate family balance sheets and where capital gains are taxed at ordinary state rates reaching 13.3% with no preferential treatment. A step-up that eliminates gain is worth more here than in most states.

The planning question for a family under $15 million is no longer how to reduce the taxable estate. It is how to preserve basis, manage property tax reassessment, and transfer efficiently without probate.

Who Still Needs Estate Tax Planning

Above the exemption — and in several situations below it — the traditional techniques still apply:

• Business owners whose company value is concentrated and illiquid; estate tax is payable in cash within nine months, and Section 6166 installment relief has strict eligibility requirements
• Real estate families holding appreciated California property, where value grows faster than the indexed exemption
• Couples relying on portability, who must file Form 706 to preserve it
• Families with non-citizen spouses, where the unlimited marital deduction is unavailable without a QDOT
• Anyone with foreign assets, where FBAR and FATCA reporting and foreign trust rules apply
• Multi-generational transfers implicating the generation-skipping transfer tax, which has its own exemption and its own allocation rules

Business succession sits at the intersection of estate planning and entity structure. Our pages on buying or selling a business and business formation address the transactional side.

Frequently Asked Questions

What is the estate tax exemption for 2026?

$15 million per individual and $30 million per married couple, made permanent by OBBBA and indexed for inflation after 2026. The top rate remains 40%.

Does California have an estate or inheritance tax?

No. California imposes neither. The state’s significant death-related tax issues are property tax reassessment under Prop 19 and trust income taxation under R&TC 17742.

Do I need to file an estate tax return if the estate is below the exemption?

Not to pay tax — but a surviving spouse must file Form 706 to elect portability of the deceased spouse’s unused exclusion. Skipping it can forfeit $15 million of exclusion.

Will my children’s property taxes go up when they inherit my house?

Under Prop 19, almost certainly, unless the property was your principal residence and the child makes it their own principal residence. Rental and commercial property is reassessed to market value.

Should I give assets to my children now to reduce estate tax?

Below the exemption, usually not. Gifted assets carry over your basis; inherited assets get a step-up to date-of-death value. Gifting appreciated California property can cost more in capital gains than it saves in estate tax.

Can California tax a trust set up in another state?

Yes. Under R&TC 17742, taxation follows the residence of fiduciaries and noncontingent beneficiaries, not the state of formation. A California trustee or California beneficiary creates exposure.

What is the annual gift tax exclusion?

$19,000 per recipient for 2026. Gifts within the exclusion do not consume the lifetime exemption or require a gift tax return. Direct tuition and medical payments to the institution or provider are unlimited.

What is portability and why does it get missed?

Portability lets a surviving spouse use the deceased spouse’s unused exclusion, but only if a Form 706 is filed to elect it. Families skip it because no tax is owed and the estate is far under the threshold, not realizing the election is the only way to preserve the second $15 million.

Do I need a trust if my estate is under the exemption?

Often yes, for reasons unrelated to estate tax. A revocable living trust avoids California probate, which is time-consuming and carries statutory fees calculated on the gross value of the estate rather than the equity. For a family whose main asset is a mortgaged California home, probate cost alone frequently justifies the trust.

Review the Plan Against the Current Rules

Estate plans drafted when the exemption was scheduled to be cut in half, or before Prop 19, frequently contain provisions that no longer serve their purpose — bypass trust formula clauses that now over-fund, or transfer structures that trigger reassessment for no offsetting benefit. A plan built for a $5 million exemption behaves differently at $15 million.

Pietro Canestrelli holds an LL.M. in Taxation and advises on estate and gift tax planning, trust structuring, business succession, and the California property tax and trust residency issues that federal-only planning misses. Schedule a consultation, or review our tax planning services.