Do we have to pay “death taxes” in California?
Receiving an inheritance and not knowing how to pay taxes on that money can be dreadful, confusing, and even more demanding when you hear “death taxes,” federal estate taxes, or inheritance taxes in California. So not understanding how to pay or even if you have to pay taxes can leave you unsure of your next steps. And that is okay.
Here at The Grossman Law Firm, we have been helping our clients answer these questions for over 20 years, assisting countless clients through this challenging probate process.
In this article, you will learn about:
- What are death taxes
- How to avoid them when possible
- What you’ll owe
- And how do you pay death taxes
What are death taxes?
People that say “death taxes” are talking about a federal estate tax or an inheritance tax in California you must pay.
These are taxes imposed on the value of the estate. Death taxes are based on the value of everything you own on the day you die.
An example, on the day the settlor passes, they own a house valued at 1 million dollars. An Individual retirement account or IRA valued at 2 million dollars, with a list of beneficiaries who will receive money when they pass, a checking, savings, and brokerage account, with a bunch of bonds valued at 2 million. The estate would then be valued at 5 million dollars and taxed on the “value of everything they owned when they passed.”
Meaning death taxes are imposed on everything. If this is over the threshold, then estate taxes are owed.
California has what’s referred to as a “pickup” inheritance tax. That means under federal estate tax law, and states can impose their death tax. Up to a specific limit, the amount charged by the state is entirely deductible from federal taxes.
The irony is that, yes, CA has a death tax, but it won’t cost you anything.
What is your estate worth?
For instance, if you have 1 million going through probate, 1 million passing by non-probate transfers, and 4 million in an irrevocable living trust. Then your estate is valued at 6 million dollars.
Death taxes are imposed on everything in the 6 million dollar estate, not just the one million dollars passing through probate.
How can I avoid them?
If you are already in the probate process, it is too late. You might have to pay death taxes.
But, if you aren’t in the probate process just yet, this is a better question for your estate planning attorney. And since they will have a better idea of your specific case. They will give you better guidance on creating an estate plan that avoids probate and minimizes or avoids estate taxes.
How much will I have to pay?
For how much you might have to pay, every issue is different. And the answer will vary depending on the case. And how much the estate is worth.
Also, remember that in 2022 an individual subjected to death taxes would have to have an estate valued at 12.06 million. For couples, it is over 24.12 million.
Further, neither of the case examples above would be subjected to death taxes. That is a result of the estates being valued at under 12.06 million.
How do I pay for these?
Typically the estate has to pay death taxes. If the decedent created a trust, the trust might be responsible for a portion of the death taxes.
The responsibility of the executor or administrator is to file the estate tax return and then to use estate assets to pay whatever is owed.
If you want an overview of the California Probate Litigation Process, a more in-depth look at if probate is suitable for you, or check out our Extensive Blog Posts to understand the trust administration process and your rights as a trust beneficiary. Most importantly, our resources will help you know when you need help!
If you have questions about your specific situation, don’t hesitate to contact us to discuss a free phone consultation. You are welcome to call our office at (888) 443-6590 or fill out our GET HELP NOW form.