Unpacking the Myths and Facts of Estate Taxes in California
When you’re planning your will in California, you may be wondering what estate taxes you need to know about. It can be a very difficult topic to handle alone. Fortunately, working with an Auburn, California estate planning lawyer can help you more than you realize.
There can be complex processes concerning the management of estate taxes in California. You will need to understand these details to effectively plan your estates. But, first, you need to understand what estate taxes are.
Quick Summary:
- California does not impose a state-level estate tax, allowing residents to transfer wealth without additional state tax burdens. However, federal estate taxes may still apply to large estates based on their total value.
- Estate taxes are levied on the entire estate before distribution, while inheritance taxes are paid by recipients of inherited assets. California does not have an inheritance tax.
- To reduce federal estate taxes, strategies such as using the federal exemption, gifting assets during your lifetime, or setting up irrevocable trusts can be effective. These tools can help preserve more wealth for your beneficiaries.
- Estate planning tools like wills, living trusts, and powers of attorney can help ensure your assets are managed and distributed according to your wishes. Consulting with an experienced estate planning attorney in California can simplify the process and provide tailored solutions.
What are Estate Taxes?
The estate tax is a government fee imposed on the transfer of assets upon a person’s death. They are imposed on the total value of a deceased person’s assets at death.
It is calculated based on the fair market value (FMV) of the estate. Calculating its value includes real estate, investments, and personal property. This tax is assessed before assets are distributed to heirs and is paid by the estate itself.
Difference From Inheritance Tax
An inheritance tax is a levy on assets inherited from a deceased person. Estate taxes and inheritance taxes both relate to wealth transfer after death. However, they both differ in application:
- Estate Tax: Levied on the entire estate before assets are distributed. It is based on the total value of all assets owned by the deceased and is paid by the estate.
- Inheritance Tax: Imposed on individuals receiving assets from an estate. The rate depends on the value inherited and the relationship to the deceased. This often results in lower rates for close relatives compared to distant ones.
Does California Have an Estate Tax?
California does not currently have an estate tax on any estates, regardless of their size. If a person passes away, their estate is not subject to state-level taxation before assets are distributed to heirs.
As one of the 38 states without an estate tax, California allows residents to transfer their wealth without the burden of state taxes. However, it is important to note that while there is no estate tax, other taxes may still apply.
Federal Estate Tax Considerations
How Do I Plan My Estate in California?
Estate planning is an essential process to protect your assets and provide clear instructions for their distribution after your death. In California, there are legal tools that can simplify this process, reduce costs, and offer peace of mind for you and your loved ones.
Create a Will
A will is a key document in any estate plan. It lets you decide who gets your assets and who will take care of your young children if you pass away. Your will also names an executor, the person who will make sure your instructions are followed.
However, wills typically go through probate, a court-supervised process that can be time-consuming and costly. Probate also makes your estate details public, which may not be something everyone wants..
Consider a Living Trust
Living trusts, on the other hand, allow individuals to transfer their assets into a trust during their lifetime. It lets you stay in control of your assets while you’re alive. After you pass away, your assets are given out based on the trust’s instructions, without needing to go through probate. It also helps if you can’t manage your assets yourself, by letting someone else take over for you.
Trusts can be revocable, meaning they can be altered or revoked by the trustor at any time. They can also be irrevocable, which means they cannot be changed once established. Irrevocable trusts can offer significant tax benefits as they remove assets from the estate entirely.
Appoint Powers of Attorney
A durable power of attorney lets you pick someone to take care of your money and financial decisions if you can’t do it yourself. This way, someone you trust can manage things without needing the court to choose a guardian for you.
An advance healthcare directive (also known as a living will) allows you to name a person to make healthcare decisions for you if you’re unable to do so. It also lets you specify your preferences for medical care, making sure that your wishes are followed.
How Do I Minimize My Estate Taxes?
Minimizing estate taxes is an important part of estate planning, especially for those with significant wealth. While California does not have its own estate tax, federal estate taxes might still apply to larger estates. Below are strategies to help reduce estate taxes and protect more of your assets for your heirs:
Use the Federal Estate Tax Exemption
Although California doesn’t have a state estate tax, residents still need to consider federal estate tax laws. Federal estate taxes apply to estates that exceed a certain value, with taxes imposed only on the amount above that threshold.
One helpful option for married couples is portability, which allows them to combine their exemptions. This effectively doubles the exemption limit, providing significant tax benefits, especially for high-net-worth individuals. Proper planning can help reduce federal estate taxes and make sure more of your assets are passed on to your heirs.
Make Gifts During Your Lifetime
You can give a certain amount of money or assets to each person annually without affecting your lifetime tax exemption. These gifts help reduce the size of your taxable estate over time, all while benefiting your loved ones.
Set Up Irrevocable Trusts
Establishing trusts is another powerful strategy for reducing estate taxes. Various types of trusts can be utilized. Irrevocable trusts remove assets from the taxable estate entirely. Common types of irrevocable trusts include:
- Charitable Remainder Trusts (CRTs): Let you donate assets to charity while also providing income to your beneficiaries.
- Grantor Retained Annuity Trusts (GRATs): Allow you to transfer assets that may grow in value, reducing tax costs.
- Irrevocable Life Insurance Trusts (ILITs): Keep life insurance payouts from being included in your taxable estate.
By using these strategies, you can significantly reduce potential estate tax liabilities and ensure that more of your wealth is passed on to your loved ones or the causes you care about.
Work With Our Trusted Estate Planning Lawyer Today!
While there is no estate tax in California, federal estate taxes still exist. This implies that you will still need to make hard decisions on your financial future. Fortunately, working with a trusted Auburn, California estate planning lawyer can help alleviate your issues.
At Hall Bottomline Lawyers, our estate lawyers are ready to plan out a good future for you. Our proactive estate planning can help ensure that more of your wealth is passed on to your heirs rather than being lost to taxes. In addition, we offer strategies that are flexible to your unique circumstances.
If you’re considering your options for estate planning, don’t hesitate to give us a call. Consulting with our team is a wise step towards securing your legacy. Don’t leave your family’s financial well-being to chance—call now and get a free consultation!
