Estate planning involves more than just deciding who will inherit your assets after you pass away. It also includes the management of your assets during your lifetime and creating a plan to minimize taxes, as well as maximize the amount of your estate that will go to your beneficiaries.
Taxes are an important consideration in estate planning because they can significantly reduce the value of your estate and the amount of assets that ultimately pass to your beneficiaries.
What is an Inheritance Tax?
An inheritance tax is a tax on the transfer of assets from a deceased person to their heirs or beneficiaries. Unlike an estate tax, which is based on the total value of a deceased person’s estate, an inheritance tax is based on the amount received by each individual beneficiary. These taxes are paid by the beneficiary who receives the assets, rather than the estate itself. This means that the beneficiaries must pay the tax out of their own funds, rather than from the assets they inherit. In some cases, the executor of the estate may be responsible for ensuring that the tax is paid, but this can also vary by state.
Inheritance taxes are not imposed at the federal level in the United States, but some states do impose them. In states that have an inheritance tax, the rules and rates can vary widely. For example, some states exempt certain types of property from the tax, such as property transferred to a spouse or charity, while others do not.
Inheritance Tax vs Estate Tax
Inheritance tax and estate tax are both taxes that can be imposed on the transfer of assets from a deceased person to their heirs or beneficiaries, but they are different in several ways.
Estate tax is a tax on the total value of a deceased person’s estate, which includes all their assets and property at the time of death. The estate tax is calculated based on the total value of the estate, and it is paid by the estate itself before the assets are distributed to the beneficiaries. The federal government imposes estate tax, but some states also have their own estate tax laws.
An inheritance tax is a tax on the individual beneficiaries who receive the assets from a deceased person’s estate. The tax is calculated based on the value of the assets inherited by each beneficiary, rather than the overall value of the estate. Only a few states in the United States impose inheritance taxes, and the rules and rates vary widely.
Both inheritance taxes and estate taxes are potential costs to consider when planning your estate, and consulting with an estate planning attorney can help you understand how to minimize these taxes and distribute your assets in the most tax-efficient manner possible.
Does California Impose an Inheritance Tax?
In short, California does not impose an inheritance tax. However, this is not to say that California residents will not otherwise incur taxes.
Which states impose an inheritance tax?
Only six states in the United States impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. If you live in one of these states or are receiving assets from an estate located in one of these states, it’s important to understand the rules and rates for inheritance tax in that state.
Each state has its own rules and rates for inheritance tax. For example, some states exempt certain types of property from the tax, such as property transferred to a spouse or charity, while others do not.
Does California Impose an Estate Tax?
California does not impose a separate state-level estate tax. However, California residents may still be subject to the federal estate tax, which is a tax on the transfer of a person’s assets after their death. The federal estate tax only applies to estates with a value above a certain threshold, which is adjusted annually for inflation. As of 2023, the federal estate tax exemption is $12.06 million per individual, which means that an individual’s estate valued at less than that amount is not subject to the federal estate tax.
Types of Estate Planning Taxes in California
So, how about the types of taxes that California residents may be more likely to be subjected to? Estate planning in California typically involves several different types of taxes, including:
- Federal estate tax: As mentioned earlier, the federal estate tax is a tax on the transfer of a person’s assets after their death. The tax is only imposed on estates with a value above a certain threshold, which is adjusted annually for inflation.
- California inheritance tax: California does not impose an inheritance tax on beneficiaries who receive assets from an estate. However, if you inherit property from someone who lives in another state that does impose an inheritance tax, you may be subject to that state’s tax.
- California property tax: When you transfer property, including real estate, through an estate plan, you may trigger property tax reassessment in California. However, there are several exceptions and exclusions that may apply to minimize the property tax implications of transferring property through an estate plan.
- Capital gains tax: If you transfer appreciated assets, such as stocks or real estate, through an estate plan, your beneficiaries may be subject to capital gains tax if they sell the assets later on. However, there are strategies that can be used to minimize or eliminate capital gains tax liability for your beneficiaries.
Schedule a Consultation with a Professional Estate Planning Attorney
Taxes can be a headache and difficulties in understanding them can throw a wrench in your plans. An estate planning attorney in California can help you navigate the complex tax laws and regulations that may apply to your estate plan. At Galanti & Copenhaver, we prioritize creating an individualized experience for every client and work alongside you to understand your unique needs. Our experienced team values addressing any questions or concerns you may have in regards to the estate planning process. Schedule a consultation with one of our team members today!