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Are There California Estate Taxes?

Are There California Estate Taxes?

You may be wondering if there are California estate taxes. Despite the fact that estate taxes generally only affect the very wealthy, estate taxes remain a hotly debated—and highly politicized—issue. The Revenue Act of 1916 levied a 10 percent tax on portions of estates exceeding $5 million and has largely been a firestorm ever since. Death and taxes, when taken together, seem to bring dissension between the rich and the not-so-rich. This is due to the fact that, essentially, estate taxes create more incentive for rich people to spend their money frivolously rather than saving it for their heirs when they die. Federal estate taxes, as of 2020, are levied on assets in excess of $11.58 million, or $23.16 million for married couples. The federal estate tax can be as high as 40 percent for assets exceeding those thresholds. Roughly one in four states have their own estate taxes, with lower limits. In general, assets that transfer to spouses are exempt from estate tax. California currently has no inheritance tax or state-level estate tax. In 1982 California voters repealed the state-level estate tax, but in 2019 a bill (S.B. 378) was introduced to implement a new CA estate tax. At one point, the bill seemed to gain traction and was expected to appear on a 2020 ballot. S.B. 378 would have levied estate tax on those estates larger than $3.5 million. If the measure were to be passed, it is expected the state could collect as much as $1 billion annually in estate taxes. Under this bill, California estate taxes would have phased out once an estate reached the federal amount of $11.58 million, to avoid double-taxing estates. S.B. 378 is currently “on ice,” and it is unknown whether it will pass in the future.

What Constitutes an “Estate?”

As far as the federal estate tax, many people think of their estate as only cash and property, when in fact, an estate includes virtually everything—your home, your annuities, business interests, vehicles, personal possessions, art collections, jewelry, stocks, bonds—everything. Estate taxes are based on the total value of every single thing you own (or have an interest in, such as a business) at the time of your death. This is known as your gross estate.

Can Estate Taxes Be Avoided?

Whether or not California ends up implementing an estate tax, there are certain ways to reduce federal and state estate taxes but doing so requires a highly experienced California estate planning attorney. Every situation is unique, therefore will require unique solutions, however, some of the most common ways to avoid or reduce estate taxes include:

Consider a Family Limited Partnership

Perhaps you have a family-owned business or specific properties or assets you want to go to your children. If this is the case, you can have a Family Limited Partnership set up, making your heirs/family members limited partners. You will still be allowed to make all the decisions (as a general partner), but your heirs would have a stake in the company or own a portion of your assets, therefore your estate would be decreased and subject to fewer estate taxes.

Transfer a portion of your wealth to a charity via a trust

A Charitable Remainder Trust or a Charitable Lead Trust allows assets to pass to a tax-exempt charity. In turn, this lowers the value of your estate and the level of estate taxes. Following your death, whatever remains in the trust will be passed to your beneficiaries. You can also use a CRT to transfer stocks or other appreciating assets to the trust; you can make money off those assets throughout your lifetime, then upon your death, the investment income will be donated to charity.

Consider an Irrevocable Life Insurance Trust

While life insurance proceeds are usually not considered taxable, they could potentially be included in your estate and would then be subject to federal estate tax. By creating an Irrevocable Life Insurance Trust, the ownership of the life insurance is transferred to another person, thereby removing it from the total worth of the estate. It is important to know that creating an Irrevocable Life Insurance Trust must be done sooner rather than later; if you die within three years of making the transfer, the life insurance proceeds would still be considered a part of your taxable estate.

Give monetary gifts to family members

As of 2017, a gift of up to $15,000 per person could be given to family members as a gift, tax-free. Over the course of a lifetime, a person is allowed to gift $11.4 million before the gift tax kicks in.

How Gullotta Law Group Can Help

While you likely don’t have to worry about California estate taxes, if you are worried about federal estate taxes, it could be very beneficial for you to speak to an experienced estate planning attorney from Gullotta Law Group. The lawyers at the Gullotta Law Group have fifteen years of experience in the field of estate planning, offering friendly, attentive staff, and simple, flat-rate fees for all your estate planning needs. Contact the Gullotta Law Group to speak to a highly experienced Sonoma County estate planning lawyer who can help you plan for the future.
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