California is currently among 30 states that do not impose a state estate tax. State legislature, however, recently introduced Senate Bill SB 378 that would have imposed gift, estate and generation-skipping transfer taxes starting on January 1, 2021.
California Estate Tax Proposal
While the bill did not make a floor vote earlier in 2019, the legislation would have imposed a state estate tax exemption on estates worth $3.5 million for individuals and $7 million (not indexed) for married couples. Estates above the exemption amount would be taxed at a rate of 40 percent, with a credit for any federal estate taxes paid.
On the federal side, the 2017 tax reform bill increased the federal exemption amounts to $11.4 million for individuals and $22.8 million (indexed) for married couples, taxable at the same 40 percent rate.
This suggests that only California individuals with estates worth between $3.5 million and $11.4 million would have been subject to the state estate tax, and married couples with estates worth between $7 million and $22.8 million would have been impacted by the proposed bill.
If the bill as introduced by State Senator Scott Wiener had been passed by the California legislature and signed by Governor Newsom, it would have been placed on the November 2020 ballot to be voted on and approved by a majority of California voters before entering into law.
Current Federal Estate Tax Landscape
Under the 2017 Tax Cuts and Jobs Act, exemption amounts (as outlined above) are set to expire on December 31, 2025. When the existing legislation sunsets, exemption amounts will revert to $5.49 million for individuals and $10.98 million (indexed) for married couples.
Current law also allows unused exemption amounts from the deceased partner to be “portable” to the surviving spouse and used in addition to his or her individual exemption amount.
The History of California’s Inheritance and Estate Tax
California has not collected an inheritance tax since 1982. Inheritance tax was imposed on the person coming into the inheritance versus the estate itself before the bequest is allocated to beneficiaries.
In more recent years, California imposed a “pick-up estate tax,” which was the equivalent to the credit for state death taxes allowed under the IRS. In 2005, federal law phased out the “pick-up tax” credit, and in 2013, the federal credit was permanently repealed, eliminating any California estate tax.
Although this recently-introduced legislation has since died before getting to a floor vote, we are keeping a close watch for further efforts to revive it.
As the Partner in Charge of our Estate Planning department, please contact me at email@example.com or (805) 963-7811 to learn the best options for your estate tax planning.