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Inheritance Taxes: Do Beneficiaries Have to Pay Taxes?

By February 20, 2024September 30th, 2025No Comments
taxes

Table of Contents

  • Key Takeaways
  • Inheritance: Do Beneficiaries Have to Pay Taxes?
  • California Inheritance Tax Overview
  • Taxes on Trust Property in California
  • Other Important Tax Implications for Inherited Assets
  • Is Your Inheritance at Risk Due to Trustee Misconduct?
  • Beneficiary Rights in California
  • Probate and Legal Guidance: Why It Matters
  • Related Resources
  • California Inheritance and Taxes: Next Steps

Key Takeaways

  • California does not impose a state inheritance tax.
  • The federal estate tax only applies to estates over $13.61 million (as of 2024).
  • Beneficiaries usually do not owe income taxes on inherited assets.
  • Inherited property receives a step-up in basis, which can reduce capital gains taxes.
  • Trust distributions and property may carry additional tax responsibilities.

Inheritance: Do Beneficiaries Have to Pay Taxes?

At The Grossman Law Firm, we regularly advise California beneficiaries on inheritance issues, including when taxes do or don’t apply. Unlike some other states, California does not have a state inheritance tax. Beneficiaries who inherit property in California do not owe state tax on the inherited amount. However, this doesn’t mean there are no taxes at all.

Federal estate taxes may apply depending on the value of the estate. In 2024, the federal estate tax exemption is $13.61 million per individual. Estates valued below that amount are not subject to federal estate tax.

California Inheritance Tax Overview

At The Grossman Law Firm, we frequently counsel beneficiaries who are uncertain about whether they are liable for income tax on inherited property. Generally, they do not pay income tax on inherited property. That said, certain circumstances may trigger tax obligations:

  • If the inherited asset produces income (e.g., rental income, dividends), that income may be taxable to the beneficiary.
  • If the inheritance is held in a trust, income retained by the trust is taxed at the trust level. Income distributed to beneficiaries may be taxable to them individually.

Taxes on Trust Property in California

Trust property is subject to a unique set of tax rules. Here’s how it typically works:

  • Trusts pay income tax on retained earnings.
  • Beneficiaries pay income tax on distributions received.
  • Property taxes may apply to real estate held in trust.
  • Capital gains tax may be owed if the trust sells assets that have appreciated in value.

If you are a trustee or beneficiary, it’s critical to understand the structure of the trust and how it handles income. A tax advisor or probate attorney can help ensure compliance and avoid unnecessary liabilities.

Other Important Tax Implications for Inherited Assets

Step-Up in Basis

Inheriting property often comes with a tax advantage called a “step-up in basis.” The value of the asset is adjusted to its fair market value at the time of the decedent’s death. This reduces the capital gains tax owed when the asset is sold.

Example: If your relative bought a home for $200,000 and it’s worth $500,000 at death, your new tax basis is $500,000. If you sell the house for $550,000, you pay capital gains tax only on the $50,000 gain, not the $350,000 gain from the original purchase price.

Federal Gift Taxes

If your loved one gives you an asset before they pass away, gift tax may apply. In 2024, the IRS allows individuals to gift up to $17,000 per recipient annually without tax consequences.

For larger gifts, the donor may need to file a gift tax return. However, most won’t owe tax unless they exceed their lifetime exclusion limit (which mirrors the estate tax threshold).

Is Your Inheritance at Risk Due to Trustee Misconduct?

If a trustee fails to pay taxes, mismanages funds, or prioritizes their own interests over those of the beneficiaries, the trust and your inheritance may be at risk.

Breaches of fiduciary duty can include:

  • Failing to file trust tax returns
  • Withholding information from beneficiaries
  • Misusing or misallocating trust assets

The Grossman Law Firm helps beneficiaries protect their inheritance and hold trustees accountable. Visit our article 20 Ways Your Trustee Can Be Breaching Their Fiduciary Duties to learn more.

Beneficiary Rights in California

Suppose you’re unsure about your rights or suspect a trustee is mishandling assets. In that case, it’s essential to understand what California law states. Beneficiaries have the right to:

  • Request a copy of the trust
  • Receive regular accountings
  • Petition to remove a trustee
  • Receive distributions promptly

Explore our related articles:

More importantly, if you find yourself in a situation where you are not receiving a copy of the trust, accountings, or there is a lack of communication, you should speak with a probate attorney immediately.

Probate and Legal Guidance: Why It Matters

Probate and trust law can be complex, especially when tax implications arise. At The Grossman Law Firm, we’ve guided California families through probate and trust litigation for over 20 years.

Whether you are an executor, a beneficiary, or a concerned family member, our team is here to help you navigate the process and protect your legal rights.

If you’re just starting out, explore our Overview of the California Probate Process.

Related resources:

California Inheritance and Taxes: Next Steps

Navigating tax issues, inheritance questions, and trust administration can quickly become overwhelming, especially during a difficult time of loss. At The Grossman Law Firm, we focus exclusively on probate, trust litigation, and probate litigation in California. With over 20 years of experience representing beneficiaries, heirs, and family members, our firm is uniquely equipped to protect your rights and help you move forward with confidence. If you’re unsure whether you need to take legal action or want clarity on your situation, we can help. Beneficiaries rarely owe taxes on inherited property in California, but there are exceptions. If you’re dealing with a trust, a large estate, or a difficult trustee, it’s best to consult a legal professional.

At The Grossman Law Firm, we offer free 30-minute phone consultations for qualifying cases. Call (888) 443-6590 or submit a request through our Get Help Now form to get started.

Our Intake Specialists can evaluate your case at no cost to you to assess your situation and determine the best course of action. Qualifying cases will be scheduled for a Free Phone Consultation with Attorney Scott Grossman.