Estate Planning in California: What to Do If Your Estate Is Over the Federal Exemption Limit

If you're in California and your estate is valued at over $13.61 million (the federal estate tax exemption in 2024), you need to take action to reduce your heirs' estate tax liability. Without proper planning, large estates can get hit with high taxes when passed on to beneficiaries. Here, we’ll cover smart estate planning strategies—like trusts—that can help protect your wealth, ensure it goes to your loved ones, and avoid excessive taxes.

Understanding the Federal Estate Tax Exemption

The federal estate tax exemption allows individuals to pass on a certain amount of assets without those assets being taxed. In 2024, that limit is $13.61 million. However, for estates exceeding this amount, federal estate taxes can apply at rates up to 40%. In high-value areas like California, it’s common for estates to exceed this exemption, making advanced planning essential.

1. Using an Irrevocable Life Insurance Trust (ILIT) to Exclude Life Insurance from Your Estate

Many people in California don’t realize that life insurance payouts are considered part of their taxable estate. With an Irrevocable Life Insurance Trust (ILIT), you can remove the value of life insurance from your estate, potentially saving millions in taxes.

By transferring a life insurance policy into an ILIT:

• The policy proceeds are not included in your estate when you die.

• The trust can use those funds to pay for estate taxes or provide financial support for your beneficiaries.

This strategy can be especially beneficial for those who own large life insurance policies and have estates over the exemption limit.

2. Qualified Personal Residence Trust (QPRT): Reducing Taxes on Your Home

In places like Los Angeles, where home values are often high, a Qualified Personal Residence Trust (QPRT) can help reduce taxes on your primary or vacation home. This type of trust allows you to transfer ownership of your home to your heirs at a discounted value while you continue to live in it for a set number of years.

If you have a home in Los Angeles or another high-value neighborhood, placing it in a QPRT can help minimize the taxable value of your estate, reducing the overall tax burden on your heirs.

3. Grantor Retained Annuity Trust (GRAT): Avoid Taxes on Appreciating Assets

If you own assets that are likely to increase in value, such as stocks, real estate, or a business, a Grantor Retained Annuity Trust (GRAT) is a powerful tool to transfer those assets to your heirs with minimal tax consequences.

With a GRAT:

• You place appreciating assets into the trust and receive an annuity payment for a fixed period.

• At the end of the trust term, any remaining assets (including any growth) go to your beneficiaries tax-free.

This strategy is particularly effective for California residents with high-value investments, allowing them to pass on appreciating assets while avoiding high tax rates.

4. QTIP Trust: Protecting Your Spouse and Deferring Estate Taxes

A Qualified Terminable Interest Property (QTIP) Trust is a popular estate planning tool for those who want to provide for their spouse after their death while also controlling the ultimate distribution of assets.

Here’s how a QTIP Trust works:

• Your spouse receives income from the trust for the rest of their life.

• When your spouse passes away, the remaining assets go to your designated beneficiaries (such as children).

The main benefit of a QTIP trust is that it delays estate taxes until your spouse passes away, allowing the assets to remain protected while supporting your spouse. This is an excellent option for California residents who have complex family dynamics or blended families and want to ensure that assets are passed down according to their wishes.

5. Charitable Remainder Trust (CRT): Reduce Taxes and Support a Charity

If you're charitably inclined, a Charitable Remainder Trust (CRT) can be a win-win strategy. With a CRT, you can:

• Transfer assets into the trust and receive income from them for a set number of years or for life.

• At the end of the trust term, the remaining assets go to the charity of your choice.

Not only do you get a charitable tax deduction, but the assets in the CRT are removed from your estate, reducing potential estate taxes. This can be an ideal strategy for those who want to leave a legacy with California-based charitieswhile also ensuring their financial security during their lifetime.

6. Dynasty Trust: Preserving Wealth for Future Generations

A Dynasty Trust is perfect for those who want to pass on wealth for multiple generations. It allows you to keep assets growing tax-free for the benefit of children, grandchildren, and even great-grandchildren.

This type of trust avoids estate taxes at every generation, making it a powerful tool for families with large estates that they want to preserve over the long term.

7. Gifting Strategies: Using Annual Exclusion Gifts

One of the simplest ways to reduce your estate’s taxable value is to start giving away money while you’re alive. Under the annual gift tax exclusion, you can give up to $17,000 per person per year (in 2024) without paying gift taxes or reducing your lifetime exemption.

For those with large families, gifting to multiple children and grandchildren every year can quickly reduce the size of your estate, bringing it under the federal exemption limit. This is especially useful in California, where estate values can grow quickly due to high real estate prices and successful investments.

8. Portability: Maximizing the Estate Tax Exemption for Couples

If you’re married, you can take advantage of portability, which allows your spouse to inherit any unused portion of your federal estate tax exemption. This effectively doubles the exemption for married couples from $13.61 million to $27.22 million.

By using this strategy, many couples can avoid estate taxes altogether, even with larger estates typical in areas like Los Angeles and San Francisco.

Final Thoughts: Protect Your Wealth with Smart Estate Planning

For California residents, especially in high-value areas like Los Angeles, estate planning is critical to ensure that your heirs are not burdened by large estate taxes. By using strategies like ILITs, QTIP trusts, GRATs, and QPRTs, you can reduce or even eliminate estate taxes while keeping control of your assets.