For many California families, taxes are one of several important factors to think about when organizing an estate plan. Tax planning, in this context, refers to the process of understanding how taxes may affect the transfer of assets to loved ones, both during a person’s lifetime and after death. While taxes are rarely the only consideration, they can influence which planning tools a family chooses to use.
This article explains, in general terms, how estate-related tax issues may arise and how trusts and other estate planning tools may relate to those issues. It is not a substitute for advice from an attorney or tax professional, who can review a family’s specific situation.
Federal Estate and Gift Tax: A General Overview
The federal government imposes taxes on certain large transfers of wealth, whether made during a person’s lifetime (gift tax) or after death (estate tax). These rules apply nationwide and are subject to change, so families should confirm current rules with a qualified professional rather than relying on older information.
Most estates do not owe federal estate tax, because the federal government allows a substantial amount of wealth to pass tax-free. However, the exact amount of this allowance can change based on federal law, so it should not be assumed to stay the same over time.
For related reading, see how taxes work in a living trust.
Does California Have a State Estate Tax?
California does not currently impose its own separate estate tax or inheritance tax. Families should still be aware that federal estate and gift tax rules may apply depending on the size and structure of the estate, and that other types of taxes, such as property tax reassessment or income tax on inherited assets, may still be relevant.
Income Tax Considerations for Inherited Assets
When a person inherits assets, questions often come up about how those assets will be treated for income tax purposes. One concept that frequently comes up is the adjustment of an asset’s tax basis when it passes to a beneficiary, which can affect how much gain or loss is recognized if the asset is later sold.
Trusts may also have their own income tax considerations, depending on how they are structured and whether they are revocable or irrevocable. A tax professional can explain how a specific trust may be treated.
How Trusts and Other Tools May Relate to Tax Planning
Various estate planning tools are sometimes used by families who want to think about both asset management and potential tax considerations. These may include:
- Irrevocable trusts, which may be used in certain situations involving gift or estate tax planning
- Qualified Personal Residence Trusts, which involve transferring a home into a trust under certain conditions
- Charitable planning tools, which may allow a person to support causes they care about while also addressing certain tax considerations
- Retirement account planning, including how retirement accounts such as IRAs may be addressed in an estate plan
Each of these tools works differently, and whether any of them fits a particular family’s goals depends on many factors, including the value and type of assets involved, family circumstances, and current federal and state law.
Learn more about Qualified Personal Residence Trusts, charitable planning, and IRA trusts.
Tax Planning and Asset Protection
Tax planning and asset protection are related but distinct concepts. Tax planning generally focuses on how transfers of wealth may be treated for tax purposes, while asset protection generally focuses on how assets may be organized to address other types of risk. Some families consider both topics together as part of a broader estate plan.
Read more about asset protection planning.
How VK Law Can Help
VK Law is a law firm serving clients in California, Nevada, and New York. The firm can help families understand how estate planning tools may relate to tax considerations, review existing estate plans, and explain how trusts, beneficiary designations, and other documents may interact with federal tax rules.
To talk with VK Law about your planning options, call 877-780-4727.
Frequently asked questions Tax Planning
No. Most estates fall below the federal estate tax exemption amount and do not owe federal estate tax. The exact exemption amount can change based on federal law, so it's a good idea to confirm current limits with a tax professional.
California does not currently have its own separate state estate tax. However, other taxes, such as federal estate tax or income tax on inherited assets, may still apply depending on the situation.
The tax treatment of a trust depends on how it is structured, including whether it is revocable or irrevocable. A tax professional or attorney can explain how a specific trust may be treated.
Tax planning generally focuses on how transfers of wealth are treated for tax purposes, while asset protection generally focuses on organizing assets to address other types of risk. Some families consider both as part of an overall estate plan.
Tax rules can be complex and change over time. Many families find it helpful to speak with an attorney or tax professional who can review their specific situation and explain how current rules may apply.
