Does California Have an Inheritance Tax?

If you inherit money in the event of someone’s death, you may have to pay inheritance tax depending on where you live. There are only six states that require an inheritance tax.

So … does California have an inheritance tax?

Does California Have an Inheritance Tax?

Inheritance is the practice of transferring money, property, titles, debts, or obligations to an individual upon your death. In some states, the person who receives the asset might be responsible for paying an inheritance tax after inheriting the asset.

Does California have an inheritance tax?

No – there is no inheritance tax in California.

There are a few complications to consider. While there are several states that do not have estate or inheritance taxes, each state has its own set of rules depending on where you live and where the property is located.

The only states that currently impose an inheritance tax are:

• Nebraska
• Idaho
• Kentucky
• Pennsylvania
• New Jersey
• Maryland

Let’s say, for example, you live in California, the property you’d like to distribute is in California, and the person you’d like to give the item to is also in the same state. In this case, no one will pay any inheritance tax.

But what happens if you live in California, where there is no inheritance tax and own property in Kentucky?

There is an inheritance tax in Kentucky, so the person who inherits that piece of property will end up paying inheritance tax for that particular item. You may or may not have to pay an inheritance tax on property that is given to you from a California estate if you live in a state that has its own inheritance tax.

Estate Tax vs Inheritance Tax

To be clear, estate taxes and inheritance taxes are not the same things. Estate taxes are taken care of when the property is in probate before any property is disbursed.

California does not have an estate tax, so probate is generally spent verifying the validity of the will and confirming who will act as executor of the estate.

Inheritance taxes, where they apply, are levied on a personal level after the estate has been distributed. While a state may choose to levy an inheritance tax, the federal government does not.

While some states do not levy estate taxes, the federal government does. That said, they’re rather generous about the value of an estate that can be taxed. Previous to 2018, any estate valued over $5.49 million would be subject to federal estate tax. New regulations passed in 2017 increased the value to $11.18 million, with the possibility of a married couple being able to go tax-free on estates valued up to $22.46 million.

What About Gift Tax?

Gifts are different because they are given while you are living. This is a great way to minimize the value of your estate for tax planning purposes. The state of California does not have a gift tax, but in this case, there is a federal limit that must be considered. For example, any gifts made in 2017 would be taxed if they were valued over $14,000. Gifts made in 2018 and 2019 cannot exceed $15,000 without being taxed.

Things to Consider When Leaving an Inheritance

You can rest easy knowing your recipients won’t have to pay taxes on their inheritance. That said, there are still quite a number of things to consider as you decide who is going to get what, how much, and when. Consider the following:

• Do you have children from separate marriages? If appropriate, make sure your estate is set up so that there are trusts or specific inheritances set up for both sides of your family. This will help to avoid arguments later on.
• Are your children old enough to handle an inheritance? You can set it up so that they have trustees, or so they can’t access it until a certain age.
• Are your children mentally capable of handling an inheritance, regardless of age? You may need to designate a trustee to help a child with mental or physical disabilities. Children who are simply irresponsible may need to be left less, or may need trusts that pay out in increments over time.
• You don’t always have to give your money to individual family members or friends. You might want to set up a foundation to benefit a charity or cause of your choice; or you may want to simply leave your estate to a charity you hold close to your heart.
• Decide whether or not you even want to leave an inheritance. In the case of children, you may want to use the annual gift amount to help pay off student loans or mortgages. This won’t add to their wealth in a huge lump sum after you pass, but it will help them to eliminate their debts faster so they can live a more secure life.

A lot of people fear that letting their children know they will be receiving an inheritance will hold them back from achieving more in life. They are afraid their kids will become comfortable and ultimately rely on financial gifts and then their inheritance as survival funds.

While only you can assess your child’s attitude toward money, you should know you do have options if this is your concern, too. Many opt to simply not let their children know what level of wealth they have amassed, much less telling them what will be available after death. This removes any expectations, potential arguments, and attempts at negotiation or extortion.

The only thing your family really needs to know is that you have a lawyer and who it is. They should know that there is an estate plan and a will, and where it can be found or who to contact once you pass away. Other than that, all they need to know regarding the estate is that it has been pre-arranged. You should feel free to show them your will in advance if you believe it is in your best interest to do so; you should never feel forced.

Conclusion

If in doubt, get in touch with a California estate planning attorney. A qualified lawyer can help you to set up trusts, write out your will, and make sure all aspects of your estate are handled correctly. They’ll also be able to help you minimize your tax burdens so that as much of your legacy as possible is distributed the way you want.