California does not impose a state estate tax, inheritance tax, or gift tax. However, Proposition 19 (effective February 2021) eliminated the parent-child exclusion for investment property, creating property tax reassessment costs that can exceed estate taxes in other states. Add city transfer taxes up to 6% in San Francisco, SB 131 killing DING trusts, and the nation's most expensive probate system, and California estate planning is anything but simple.
On the positive side, California's community property rules provide a full step-up in basis under IRC 1014(b)(6) that can save hundreds of thousands in capital gains taxes.
Prop 19 Reassessment Impact Calculator
CA City Transfer Tax Calculator
Community Property Step-Up Estimator
California Estate Planning Guide
No Estate Tax — But Significant Transfer Costs
California does not impose a state estate tax, inheritance tax, or gift tax. The state's "pick-up" tax (which mirrored the federal state death tax credit) was effectively eliminated when the federal credit was phased out under EGTRRA (2001-2005). Unlike states such as New York, Oregon, and Massachusetts, California has not decoupled from the federal system to impose its own estate tax.
However, California imposes several significant costs on property transfers at death and during lifetime:
- Property tax reassessment (Prop 19): Inherited investment property is fully reassessed to fair market value, potentially increasing property taxes by 5-10x.
- City transfer taxes: San Francisco (up to 6%), Oakland (up to 2.5%), LA Measure ULA (4-5.5%), and Culver City (1.5%) impose transfer taxes far exceeding most states' estate tax rates on real property.
- Probate costs: California's statutory probate fees are among the highest in the nation, based on gross estate value (not net).
- Income tax on trust distributions: California's 13.3% top rate applies to trust income distributed to CA beneficiaries.
- SB 131: Killed DING/ING trusts for CA residents, eliminating a major income tax planning strategy.
The Silver Lining: Community Property
California's status as a community property state provides a massive tax advantage: the full step-up in basis under IRC 1014(b)(6). When one spouse dies, BOTH halves of community property receive a stepped-up basis — not just the decedent's half. For a couple with $3 million in built-in gains, this saves approximately $1.1 million in combined federal and state capital gains taxes.
Proposition 19: The End of Inherited Property Tax Benefits
Proposition 19, approved by California voters in November 2020 and effective February 16, 2021, fundamentally changed how inherited property is taxed in California. It replaced the broad parent-child exclusion under former Proposition 58 (1986) and Proposition 193 (1996).
Before Prop 19 (Under Prop 58/193)
- Children could inherit any property — including investment properties — and keep the parent's low assessed value.
- Primary residence: unlimited exclusion from reassessment.
- Other property: up to $1 million in assessed value excluded.
- This allowed families to pass down rental properties with property tax bills frozen at decades-old levels.
After Prop 19
- Investment property: Fully reassessed to current FMV. No exclusion whatsoever.
- Primary residence (qualifying): Excluded ONLY if the child uses it as their primary residence within one year of transfer AND files a claim. Even then, the exclusion is capped — if FMV exceeds assessed value by more than $1 million, the excess is partially reassessed.
- Grandparent-grandchild: Same rules as parent-child, but only applies if the parent is already deceased.
The $1 Million Cap Math
The cap works by adding up to $1 million to the existing assessed value. Example: Parent's assessed value is $200,000 and FMV is $1,800,000. The child's new assessed value is $200,000 + $1,000,000 = $1,200,000 (not $800,000, which would be FMV minus $1M). The FMV gap above the cap ($600,000) is reassessed.
A family that purchased a Bay Area rental property in 1985 for $150,000 (now worth $2.5 million) would see the property tax increase from approximately $1,650/year to approximately $27,500/year — a $25,850 annual increase, or $258,500 over 10 years. Under the old rules, the child would have inherited the $1,650 tax bill.
SB 131: California Kills DING/ING Trusts
Senate Bill 131, signed into law in 2023 and effective January 1, 2024, targets Incomplete Gift Non-Grantor (ING) trusts — also known as Delaware Incomplete Gift Non-Grantor (DING) trusts when established in Delaware.
What ING Trusts Were
An ING trust was a trust established in a no-income-tax state (typically Delaware, Nevada, or South Dakota) where the grantor retained enough power to make the gift "incomplete" for gift tax purposes, but not enough to be treated as the owner for income tax purposes. The trust was a separate taxpayer, and because it was situated in a no-income-tax state, the income escaped California's 13.3% tax.
How SB 131 Works
SB 131 amends Revenue & Taxation Code § 17081.5 to treat the income of an ING trust as taxable to the California-resident grantor. Specifically:
- If the transfer to the trust is an incomplete gift for federal gift tax purposes, AND
- The trust is not a grantor trust for federal income tax purposes, THEN
- California treats the trust income as if the grantor still owns the assets.
This effectively eliminates the benefit of ING trusts for California residents. The only way to avoid California income tax on trust assets is to make a completed gift (incurring gift tax) and establish the trust in a no-income-tax state with no California-resident trustee or beneficiary.
SB 131 applies to income earned on or after January 1, 2024, regardless of when the trust was established. Existing ING trusts are not grandfathered. California residents with existing ING trusts must restructure (convert to a completed-gift trust) or accept California taxation on the trust income.
Community Property: California's Biggest Estate Planning Advantage
Under California Family Code § 760, all property acquired during marriage by either spouse is presumed to be community property, owned equally by both spouses. This classification has enormous tax implications.
The Full Step-Up Under IRC 1014(b)(6)
When one spouse dies, the Internal Revenue Code provides that BOTH halves of community property receive a stepped-up basis to fair market value — not just the decedent's half. This is codified in IRC § 1014(b)(6) and applies in all nine community property states (CA, AZ, TX, NV, NM, WA, ID, WI, LA).
In separate property states, only the decedent's half receives a step-up. The surviving spouse's half retains its original basis. For a property with $2 million in gains, the community property step-up saves approximately $370,000 more in capital gains tax than the separate property step-up.
Community Property with Right of Survivorship (CPWROS)
California allows property to be titled as community property with right of survivorship (Family Code § 750). This provides:
- Full step-up on both halves (community property benefit)
- Automatic transfer to surviving spouse without probate (survivorship benefit)
- No need for a trust to avoid probate on this specific asset
Transmutation Agreements
Spouses can change the character of property from separate to community (and vice versa) through a transmutation agreement under Family Code § 852. Converting separate property to community property before one spouse's anticipated death can create a full step-up on property that would otherwise only get a half step-up. This requires a writing signed by the spouse whose interest is adversely affected.
California's City Transfer Tax Maze
California's base documentary transfer tax is $1.10 per $1,000 of consideration at the county level, with most cities imposing an additional $1.10 per $1,000. However, several major cities have enacted their own tiered transfer taxes that can reach extraordinary levels.
| Jurisdiction | Rate Structure | Tax on $5M Property |
|---|---|---|
| Standard CA County | $1.10 per $1,000 (0.11%) | $5,500 |
| San Francisco | Tiered: 0.68%-6.00% | $37,500 |
| Oakland | Tiered: 1.0%-2.5% | $75,000+ |
| Los Angeles (Measure ULA) | 4% over $5M; 5.5% over $10M | $200,000 |
| Culver City | 1.5% over $1.5M | $75,000 |
San Francisco Transfer Tax Brackets
- Up to $250,000: 0.68%
- $250,001 – $1,000,000: 0.68%
- $1,000,001 – $5,000,000: 0.75%
- $5,000,001 – $10,000,000: 1.50% (Prop N, 2020)
- $10,000,001 – $25,000,000: 2.25%
- $25,000,001 – $75,000,000: 2.75% (Prop I, 2020)
- Over $75,000,000: 6.00% (Prop I, 2020)
Death Transfer Exemptions
Most California transfer taxes exempt transfers at death (through will, trust, or intestacy). However, gift transfers during lifetime are generally NOT exempt. This creates a planning consideration: transferring property before death to avoid estate administration costs may trigger transfer taxes that would not apply at death.
California's Expensive Probate System
California probate is governed by the Probate Code and uses statutory fee schedules (Probate Code § 10810) based on the gross estate value — not the net estate after debts. Both the attorney and the personal representative are entitled to:
- 4% on the first $100,000
- 3% on the next $100,000
- 2% on the next $800,000
- 1% on the next $9,000,000
- 0.5% on the next $15,000,000
For a $2 million estate: attorney fees = $33,000, personal representative fees = $33,000, total = $66,000. These fees are based on gross value — a home worth $2M with a $1.5M mortgage still incurs fees on the full $2M. Probate also takes 12-18 months minimum.
Probate Avoidance Strategies
- Revocable Living Trust: The gold standard for California estate planning. Assets in the trust bypass probate entirely. Virtually every California estate plan should include one.
- Transfer-on-Death (TOD) Deed: Available since January 1, 2016 under Probate Code § 5600-5696. Revocable, must be recorded before death. Simpler than a trust for single-property situations.
- Joint Tenancy / CPWROS: Property passes automatically to the surviving joint tenant. No probate needed.
- Payable-on-Death (POD) Accounts: Bank accounts, brokerage accounts, and retirement accounts with designated beneficiaries bypass probate.
- Small Estate Affidavit: For personal property up to $184,500 (Probate Code § 13100). Real property requires a petition (Probate Code § 13150).
Related California Resources
Frequently Asked Questions: California Estate Planning
No. California does not impose a state estate tax, inheritance tax, or gift tax. However, significant transfer costs exist through Prop 19 reassessment, city transfer taxes, and probate fees.
Prop 19 (effective Feb 2021) eliminated the parent-child exclusion for investment property. Inherited investment property is now fully reassessed. Only primary residences qualify for a limited exclusion with a $1M cap.
Inherited rental properties are fully reassessed to FMV with no exclusion. A rental bought for $200K in 1985, now worth $2M, sees taxes jump from ~$2,200/year to ~$22,000/year.
SB 131 (effective Jan 2024) kills DING/ING trusts for CA residents by taxing the trust income as if the grantor still owns the assets. Existing trusts are not grandfathered.
Under IRC 1014(b)(6), BOTH halves of community property get a stepped-up basis at the first spouse's death. A $200K basis property worth $2M gets a full $2M basis, eliminating $1.8M in gains (saving ~$670K in taxes).
San Francisco has tiered rates from 0.68% to 6% on transfers over $75M. A $5M property in SF incurs approximately $37,500 in city transfer tax alone, plus county tax.
Measure ULA imposes 4% on property sales above $5M and 5.5% above $10M in LA city limits. It has faced legal challenges and parts are enjoined. Check current status before relying on its application.
Essentially yes, if you own real property. CA probate fees on a $2M estate total ~$66K (attorney + representative). A living trust avoids these entirely and saves 12-18 months.
$184,500 for the small estate affidavit (personal property only, Probate Code § 13100). Real property requires a separate petition regardless of value.
A Transfer-on-Death deed (Probate Code § 5600-5696, effective 2016) names a beneficiary who receives the property at death without probate. It is revocable and must be recorded before death.
Family LLCs allow transferring interests at discounted values (DLOC/DLOM). CA charges an $800 annual minimum franchise tax. Prop 19 may apply to LLC interest transfers if the LLC holds real property.
Yes. California conforms to IRC § 1014 step-up in basis. Combined with CA's 13.3% top income tax rate, the step-up can save 37.1% in combined federal and state capital gains taxes.
A Qualified Personal Residence Trust transfers a home at a discounted gift tax value. Especially valuable for Bay Area/LA homes. Note that the transfer may trigger Prop 19 reassessment if the beneficiary does not use it as a primary residence.
Generally yes. Death transfers (through will, trust, or intestacy) are typically exempt from documentary transfer tax and city transfer taxes. Lifetime gift transfers may not be exempt.
Effectively no, after SB 131 (effective Jan 2024). California now taxes ING trust income as if the grantor still owns the assets. Existing trusts are not grandfathered.
Oakland has tiered rates: 1.0% up to $300K, 1.5% for $300K-$2M, 1.75% for $2M-$5M, and 2.5% above $5M. These are in addition to Alameda County documentary transfer tax.
Culver City's Measure CU (effective 2023) imposes 1.5% on residential sales over $1.5M, in addition to standard LA County documentary transfer tax. Separate from LA's Measure ULA.
CA taxes trust income at 13.3% if the trust has a CA-resident trustee, beneficiary, or grantor. The apportionment formula (R&TC § 17742-17745) determines how much is CA-source. SB 131 specifically targets ING trusts.
Transfers into and out of revocable trusts are generally not reassessment events under R&TC § 62(d). Transfers from irrevocable trusts to beneficiaries may trigger reassessment. Parent-child transfers are subject to Prop 19 regardless.
The county rate is $1.10 per $1,000 (0.11%). Most cities add another $1.10, making it $2.20 per $1,000 in incorporated areas. SF, Oakland, LA, and Culver City have their own higher tiered rates instead.
California Estate Planning Consultation
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