Estate Tax Overview

One area of the California estate planning world that does not get much attention these days is Estate Taxation. Although currently estate taxation does not affect a large portion of the population it is still good to know the basics.

California State Estate Tax

As many of my clients are, you may be surprised to learn that California does not have a state level estate tax like many other states. New York, for example has a top state estate tax of sixteen percent for any assets over a certain exclusion amount. I do not want to jinx the current situation so I will stop talking about it now.

Federal estate Tax

The federal estate tax is levied at a rate of forty percent on any property passed at death with value in excess of the estate tax exclusion for that year. For 2014, the federal estate tax exclusion amount is five million, four hundred thousand dollars per person. However, married spouses can combine their exclusions even if they do not die during the same year by filing an estate tax return at the death of the first spouse. For many years, the exemption was significantly lower than it is now. It hovered around six hundred thousand dollars for a number of years.

 Federal Estate Tax as Between Spouses

A married person can leave an unlimited amount of property to their spouse without incurring federal estate tax. When a spouse passes away, the survivor should still file an estate tax return in order to receive the estate tax exclusion of the first spouse on the death of the second spouse. By filing a return, the estate tax exclusion from the year of death is locked in and will follow the surviving spouse until their death. This estate tax exclusion will be added to the exclusion of the second spouse to pass away to determine how much of the entire estate is excluded from the federal estate tax.

 Federal Estate Tax and Gift Tax

The lifetime gift tax exclusion for any year is equal to the estate tax exemption. So in 2014, you can give away two million four hundred thousand dollars in property as an individual without paying gift tax. However, that gift counts against the eventual estate tax exemption you will receive. Gifting property either outright or with an irrevocable trust is a popular choice for people who fear that the estate tax exclusion may shrink in the coming years. By using an irrevocable trust the property can be gifted without the recipient having instant control or access to the property.

This coverage of estate tax is by no means comprehensive and you should always consult a qualified accountant or attorney if you have any questions.


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