Taxes can be daunting. There are many different types of taxes in the United States and rules that go along with each one, making this subject very difficult to wrap your head around. Receiving an inheritance can, thus, also come with a lot of questions, one of the most common ones being whether it will result in inheritance tax – an aspect of inheritance we don't look forward to as much.
You may be subject to an inheritance tax if you inherit money or property after a loved one passes away. Even though California is notorious for being one of the highest-taxed states in the nation regarding income taxes, not all states are subject to inheritance tax, with California being one of them. Remember that this does not necessarily mean that collecting your inheritance will be completely tax-free.
Keep reading for clarification on inheritance tax in California, and learn everything you need to know about how the inheritance tax and estate tax work in the state of California for peace of mind.
What Is Inheritance Tax?
An inheritance tax is a tax imposed by some states on the recipients of inherited assets. It’s a levy on assets inherited from a deceased person. The inheritance tax is not really common in the U.S., and the federal government doesn't have an inheritance tax. Only six U.S. states currently have an inheritance tax in place.
Whether or not it applies depends on the state in which the deceased lived or owned property, the value of the inheritance, and the beneficiary's relationship to the decedent. For example, there are exceptions for spouses – spouses are automatically exempt from inheritance taxes. At the same time, more distant heirs, such as siblings, nieces, nephews, and friends, typically pay inheritance tax, with the tax rate escalating as the degree of kinship decreases.
What Is an Estate Tax?
An estate tax is a financial levy on an estate that exceeds the minimum threshold set by law based on the current value of its assets. State and federal taxes and laws vary, but generally, only estates valued at or above specific amounts are subject to taxes on estates. What is the most you can inherit without paying taxes? Or, in other words, what is the federal estate tax threshold? It only applies to assets over $13.61 million as of 2024.
Estate taxes are calculated based on the estate's fair market value (FMV) rather than what the deceased originally paid for its assets. The tax is levied by the state where the deceased person was living at the time of their death. Recipients of an estate's assets may be subject to inheritance tax if it’s also above certain limits. However, assets transferred to spouses are exempt from estate tax. Federal estate tax rates range from 18% to 40%, depending on the value of the estate.
What's the Difference Between Estate Taxes and Inheritance Taxes?
While inheritance tax and estate tax are both taxes on inheritance and referred to as a “death tax,” and often used interchangeably, they are, in fact, two distinct taxes. The main difference between inheritance and estate taxes is the person responsible for paying the tax. Unlike inheritance tax rules, estate taxes are charged against the estate regardless of who inherits the deceased's assets, that is, the recipients of inheritance.
An inheritance tax is a levy on assets inherited from a deceased person. Unlike the estate tax, which is levied on the value of an estate after the death of the owner, an inheritance tax is levied on the value of the rightful inheritance received by the beneficiary, and it is the beneficiary who pays it. In other words, an estate tax is assessed on the estate before its assets are distributed, while an inheritance tax may be imposed on the bequest's beneficiaries.
Is Inheritance Taxable In California? Overview of Inheritance Law in California
What is the inheritance law in California? Is there an inheritance tax in California? In 2024, only six states collect inheritance tax – Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Maryland has the dubious distinction of being the only state to collect both inheritance and estate tax rates.
Do I Have to Pay Taxes on a Property I Inherited in California?
California residents don’t need to worry about a state inheritance tax because it no longer exists. Luckily for all California residents and inherited property owners, inheritance has not been subject to tax in California since 2005. So, if you live in California, you are inheritance tax-free as California does not have a state-level inheritance tax. However, there are a few exceptions to this rule, such as:
- The Federal Estate Tax – The federal estate tax law applies for individual estates exceeding $13.61 million dollars per person in 2024.
- Retirement Accounts – If you inherit a retirement account, you will be subject to income tax as you withdraw the assets from the account. Your withdrawals from the retirement account will be considered income, so you will need to pay income tax.
- Capital Gains Tax – If you choose to sell the property you inherited in California, you do pay capital gains tax on the increased value or, in other words, any gains that the asset made since you inherited it.
Does California Tax Foreign Inheritance?
You’re probably also wondering if the inheritance tax of another state applies to your non-existent inheritance tax in California. So, let's explain what happens if you inherit foreign assets or property from a non-California resident. Even if you live in California or another state that does not have an inheritance tax, if the person you are set to inherit from were living in a state that does at the time of death, then you would owe an inheritance tax to that state.
For example, if you live in California and inherited major assets or estate after the death of your cousin who lived in Kentucky at the time of death, you would owe the state of Kentucky inheritance tax (if it's above the threshold) because it’s one of the few states that still collect it. In contrast, if you would inherit from someone who passed away in California, you would be able to get the inheritance tax-free.
Federal Gift Tax Law In California
You’re probably relieved to learn that there are no federal or California inheritance taxes. However, California residents are still subject to federal gift taxes, as they apply across the entire United States. How much money can you inherit without paying taxes in California?
Each California resident may gift a certain amount of property in a given tax year, tax-free. In 2024, the federal gift tax allows individuals to leave up to $18,000 in cash or assets to heirs or other individuals during their lifetime (or $36,000 for couples) without triggering a gift tax. There are some ways for families to gift more than the IRS rule allows, such as using irrevocable trusts, marital deductions, and intrafamily loans.
Going beyond this limit may require you to file additional paperwork, but you won’t owe an actual tax until you exceed your lifetime gift and estate tax exemption. The IRS tracks your lifetime gifts and estate tax exemption. Once your total lifetime gifts exceed the threshold, you’ll be required to pay an actual gift tax. So, get into gift planning on time.
Does California Require an Inheritance Tax Waiver Form?
Since there's no inheritance tax in California, it does not require an inheritance tax waiver form. However, some states require the estate executor to submit an inheritance tax waiver when transferring stock ownership to an estate.
Estate Tax In California
California does not impose an estate tax, but the federal government does. So, even though you won’t owe estate tax to the state of California, there is still the federal estate tax to consider. After someone passes away in the state of California, the only tax imposed on their assets will be a federal estate tax.
If you had property in another state that imposes a state-level estate tax, your estate could be required to pay both federal and state-level estate taxes. However, this applies only to estates worth over 13.61 million in 2024. If a California resident passes away with an estate valued less than the exemption amount, their estate will not be subject to federal estate taxes.
Married spouses can avoid paying a federal estate tax of up to $24.06 million after both have deceased if the proper legal processes are performed. Each spouse is entitled to their own federal estate tax exemption, although the rules for state-level estate taxes can vary.
Got Any More Questions?
We've got you covered with a quick FAQ.
Do You Pay Taxes on a Trust Inheritance?
If you’re a trust beneficiary, you must be wondering whether you need to pay taxes on a trust inheritance. The short answer? It depends on the source of the funds. Whether beneficiaries pay tax on monies received from a trust depends on how the distribution is classified.
If the money comes from the trust’s principal, you won’t be paying any taxes, as principal trusts are not taxable to the beneficiary. However, you will owe income tax if the funds come from the trust's income (interest/earnings). The legal requirements of trusts can vary, so it’s best to consult with the trustee or legal and tax counsel for guidance.
Does a Surviving Spouse Automatically Inherit Everything in California?
In California, a surviving spouse has primary rights to any part of the estate after death not legally disposed of by the will of the deceased spouse. This includes the decedent’s half of the couple’s community property. However, the surviving spouse may not inherit everything if the decedent has surviving children, as they're also rightful heirs. Some assets are not subject to California’s intestate succession and probate laws.
For example, certain assets automatically pass to the surviving spouse after death, such as real property held in joint ownership between spouses, assets with a payable-on-death or transfer-upon-death designation, and revocable trusts where both spouses are trustees (the surviving spouse maintains control of trust assets).
If you’ve lost a spouse who didn’t have a will or if you’re concerned about your rightful inheritance, consider seeking legal advice in these difficult times - an estate attorney or at least a financial advisor.
Do I Need to Claim Inheritance in California?
In California, you do not need to claim inheritance, since the state does not impose an inheritance tax, which means that money or property received from an inheritance is not subject to state-level taxation. However, if the estate is large, it’s essential to be aware of federal estate tax laws, as states valued above certain thresholds may be subject to federal estate taxes.
How Can You Minimize Inheritance Taxes in California?
Inheritance taxes can be minimized or even avoided in some cases, for example, by leaving assets via trusts or insurance policies, making charitable donations, or gifting sums during one's lifetime. Whether you live in an inheritance tax-free state like California or not, you can always avoid property taxes by ensuring you keep below the inheritance tax or estate tax thresholds with proper estate planning.
How Do I Avoid Capital Gains Tax on Inherited Property in California?
You can avoid paying capital gains taxes on an inherited property simply by selling the entire estate as soon as you inherit it, thus not leaving any room for the property to further appreciate in value. Another option is to turn the property into a rental or use it as a primary residence for at least two years.
Of course, you can always opt to disclaim the inheritance entirely. However, keep in mind that the decision to disclaim is final and irreversible. Consider hiring a real estate planning attorney to help guide you in this process.
Thinking About Selling The Real Estate You Inherited in California?
The good news for all Californians out there is that inheritance is generally tax-free in the state of California. However, although there's no inheritance tax in California, that isn't to say you shouldn't pay attention to other taxes that may be involved when you inherit property or other assets, as there may be potential pitfalls to avoid.
Taxes can be complicated, but selling your home doesn’t have to be. At SleeveUp Homes, we aim to provide homeowners with a simple process and the best possible offer for their property. And yes, we purchase inherited property, too. No repairs or cleanups needed, no fees or commissions, no time pressure. Sell your home as-is today for cash.
Contact us today to get a free cash offer for your property!
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Zachariah Peterson (69 blogs)