Understanding Gift and Estate Taxes in California: Key Exemptions and Strategies

When it comes to estate planning in California, understanding the complexities of gift and estate taxes is crucial for ensuring your assets are transferred smoothly to your loved ones. While California does not impose its own state-level estate tax or gift tax, residents still need to navigate federal tax laws. This article provides an overview of federal estate and gift tax laws, key exemptions, and strategies to minimize tax liability in 2024.

Federal Gift Tax: What California Residents Need to Know

The federal gift tax applies to any transfer of money, real estate, or other assets while you're alive. Understanding how the federal gift tax works is essential for effective estate planning, especially in states like California that lack their own gift tax.

• Annual Gift Tax Exclusion: As of 2024, individuals can give up to $18,000 per recipient per year without triggering the gift tax. Gifts above this amount may require the filing of a gift tax return (IRS Form 709). If you're looking to reduce your taxable estate, making annual gifts under the exclusion is a great strategy.

• Lifetime Gift Tax Exemption: In addition to the annual exclusion, there’s a lifetime gift tax exemption of $13.61 million in 2024. This means you can gift up to this amount during your lifetime without incurring federal gift tax. If you exceed this threshold, the excess gifts will count against your estate tax exemption.

Federal Estate Tax: Key Exemptions for California Estates

Although California does not have a state estate tax, residents must still comply with federal estate tax laws.

• Estate Tax Exemption: In 2024, the federal estate tax exemption is set at $13.61 million per individual. This means that estates valued below this amount won’t be subject to federal estate tax. For married couples, the exemption can be doubled to $27.22 million through a process called portability, allowing the unused portion of one spouse's exemption to transfer to the surviving spouse.

• Estate Tax Rate: If your estate exceeds the federal exemption, the excess is taxed at rates ranging from 18% to 40%. Effective estate planning can help ensure that more of your estate passes to your heirs, rather than being reduced by taxes.

The Unified Credit: Gift and Estate Tax Exemption

The unified credit refers to the combined federal exemption for both gift and estate taxes. In 2024, the lifetime exemption amount is $13.61 million. This credit applies to both gifts made during your lifetime and the value of your estate upon death. Any gifts you make over the annual exclusion count against your lifetime exemption, so it's important to plan ahead.

Generation-Skipping Transfer Tax (GST Tax)

For those leaving assets to grandchildren or younger generations, the Generation-Skipping Transfer (GST) Tax is another consideration. The GST tax applies to transfers to individuals who are more than one generation younger than the donor, such as grandchildren.

• GST Exemption: The GST exemption matches the federal estate tax exemption, allowing up to $13.61 million in generation-skipping transfers without incurring the tax. Transfers exceeding this exemption will be taxed at rates up to 40%.

California-Specific Estate Planning Considerations

Although there are no state gift or estate taxes in California, there are other important considerations for those engaged in California estate planning:

• Proposition 13 and Property Taxes: California’s Proposition 13 limits property tax increases, and Proposition 19affects how low property tax rates are transferred between generations. If you're transferring property to children or other heirs, understanding these rules is essential to avoid unexpected tax increases.

• Trusts and Gifting Strategies: Many California estate planners use irrevocable trusts or annual gifting strategies to reduce the size of their taxable estates and ensure their heirs receive the maximum benefit without heavy tax burdens.

Key Estate Planning Strategies for Reducing Tax Liability

Here are some effective strategies for reducing potential gift and estate taxes in California:

1. Annual Gifting: By giving up to $18,000 per recipient per year, you can reduce the size of your estate over time without triggering the gift tax.

2. Irrevocable Trusts: Transferring assets into an irrevocable trust removes them from your taxable estate, potentially lowering the estate's value and reducing estate tax liability.

3. Charitable Giving: Gifts to qualified charitable organizations are fully exempt from gift and estate taxes, making charitable giving a smart option for reducing tax exposure.

4. Marital Deduction: Transfers between spouses are typically exempt from federal gift and estate taxes, meaning you can pass an unlimited amount of assets to a U.S. citizen spouse without tax consequences.

Conclusion

Although California residents do not face state-level estate or gift taxes, navigating the federal system is essential for effective estate planning. Whether you’re considering annual gifts, irrevocable trusts, or maximizing exemptions, planning ahead can help you minimize taxes and protect your assets for future generations.

At Brentwood Law, P.C., we specialize in helping clients navigate the complexities of estate planning in California. Whether you're looking to minimize federal taxes or protect your assets, we offer personalized solutions tailored to your unique needs.