One of the most common questions families ask when creating an estate plan is, “Will my heirs have to pay taxes on what they inherit?” Fortunately, for most Californians, the answer is no.
California does not impose a state inheritance tax or a state estate tax. In most cases, beneficiaries who inherit money, real estate, bank accounts or investments do not owe taxes simply because they receive an inheritance. However, there are several tax rules that may apply depending on the size of the estate and the type of assets involved.
The federal government imposes an estate tax on very large estates. For 2026, the federal estate tax exemption is $15 million per person (subject to future legislative changes). This means an individual can pass up to approximately $15 million to heirs without owing federal estate tax. Married couples can often protect up to $30 million through proper estate planning.
Only the value of the estate above the exemption amount is subject to tax. The federal estate tax rate can be as high as 40 percent on the taxable portion of the estate.
For example, if a person dies with a $17 million estate and has a $15 million exemption available, only the excess $2 million may be subject to estate tax. Even then, various deductions and planning techniques may reduce the tax owed.
The important point is that the federal estate tax affects only a very small percentage of Americans. Most families never have to worry about it.
An inheritance tax is different from an estate tax. An estate tax is paid by the estate before assets are distributed, while an inheritance tax is paid by the person receiving the inheritance.
California does not have an inheritance tax. However, a handful of states still impose one. If you inherit property from someone who lived in a state with an inheritance tax, it is wise to consult a tax professional to determine whether any tax applies.
Although inheritances themselves are generally not taxable income, certain inherited assets can create income tax consequences.
For example, distributions from inherited traditional IRAs, 401(k)s and other tax-deferred retirement accounts are often taxable as ordinary income. Under current law, many non-spouse beneficiaries must withdraw inherited retirement funds within 10 years of the account owner’s death.
Likewise, interest earned on inherited bank accounts, dividends from inherited investments and rental income from inherited real estate remain taxable after death.
One of the most valuable tax benefits available to heirs is the “step-up in basis.”
When someone inherits appreciated property, the tax basis is generally adjusted to the property’s fair market value on the date of death. For example, if a parent purchased a home for $100,000 and it is worth $800,000 at death, the beneficiary’s basis may increase to $800,000. If the property is sold shortly thereafter for that amount, little or no capital gains tax may be due.
For most Californians, inheriting assets does not trigger a death tax. However, large estates, inherited retirement accounts and appreciated assets can create tax consequences. Proper estate planning can help minimize taxes, avoid probate and ensure that more of your hard-earned wealth passes to the people you love.
Send your questions to ccolan@colanlegal.com and use “Alpine Mountaineer estate planning question” as the subject. We’ll answer your questions in our upcoming issues. This article is provided by your local estate planning attorney, Corina Colan. The Law Office of Corina I. Colan / (909) 265-3315 / www.colanlegal.com
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