Inheritance tax laws can be complex and vary from state to state. No, California does not have a state inheritance tax. However, there are other tax implications to consider when inheriting assets from a trust. At Stone & Sallus, we’ll guide you through the complexities of these tax laws and help you make informed decisions to protect your inheritance.
Overview of California Inheritance Tax
In California, there is no state inheritance tax. This means that when you inherit assets from a deceased person, you do not owe any tax to the state of California on those inherited assets. This can simplify the process of inheriting property and other assets significantly.
California used to have its own inheritance tax, but it was abolished in 1982. Since then, residents of California only need to consider federal estate taxes and other related tax implications, not a state inheritance tax.
Federal Inheritance Tax
While California does not impose an inheritance tax, the federal government does have an estate tax that applies to large estates. For 2024, the federal estate tax exemption is $12.92 million per individual. Estates valued above this threshold may be subject to federal estate taxes, which the estate itself pays before distribution to the beneficiaries.
Tax Implications of Inheritance
Inheriting assets can come with various tax implications that can affect the value of your inheritance. You need to know these tax events and obligations to plan and manage your estate.
Taxable Events
Some situations trigger taxes when you inherit assets. For example, if you inherit an IRA or other retirement accounts, withdrawals from those accounts are taxed as income. Selling inherited property can be taxed as capital gains if the property has appreciated since you bought it.
Beneficiary Tax Obligations
As a beneficiary you may be taxed on the income generated by the assets you inherit. For example, if the trust generates income, you may be taxed on that income when it’s distributed to you. Knowing these obligations will help you avoid surprise tax bills.
Estate Taxes
The federal estate tax applies to estates exceeding the exemption threshold of $12.92 million in 2024. Estates above this amount are taxed at rates up to 40%.
There are several deductions and exemptions that can reduce estate tax. These include the marital deduction, which allows unlimited transfers to a surviving spouse without estate tax, and charitable deductions for bequests to qualified organizations.
Good estate planning involves strategies like setting up trusts, making lifetime gifts and using the annual gift tax exclusion. These can reduce the taxable estate so more assets pass to beneficiaries.
Income Taxes
Income from assets in a trust is taxed. Trusts must file annual income tax returns and the tax rates for trusts are high so planning is important.
When income is distributed to beneficiaries, beneficiaries must report that income on their personal tax returns. The type of income (interest, dividends, capital gains) retains its character when passed to the beneficiaries.
Trustees must file the trust income tax return (Form 1041) and provide beneficiaries with the tax documents (Schedule K-1) to report their share of the trust’s income.
Step-Up in Basis
The step-up in basis is when the value of an inherited asset is adjusted to the fair market value at the time of death. This can reduce capital gains taxes when you sell the inherited asset.
Assets in a revocable living trust get a step-up in basis at the grantor’s death just like if they were owned directly by the decedent. The step-up in basis can eliminate capital gains tax on appreciated assets as heirs can sell those assets with little to no capital gains tax since the basis is adjusted.
Taxes on Gifts
The federal gift tax applies to gifts of property during the donor’s lifetime. For 2024 the annual exclusion is $17,000 per person so you can give up to that amount to as many people as you want without gift tax.
Gifts from trust assets are subject to the same gift tax rules. Trustees must consider these rules when making gifts. In addition to the annual exclusion there is a lifetime gift tax exemption of $12.92 million in 2024. Gifts above the annual exclusion reduce this lifetime exemption.
Is Your Inheritance at Risk?
- Creditor Claims: Inherited assets can be at risk from creditors’ claims. Proper estate planning can help protect these assets from potential creditors.
- Family Disputes: Family disputes can arise over inheritance, potentially jeopardizing the intended distribution of assets. Clear estate planning documents and communication can help mitigate these risks.
- Protective Measures: Establishing trusts, having clear wills, and using prenuptial agreements are some measures that can protect your inheritance from risks such as creditors and family disputes.
Contact Stone & Sallus
At Stone & Sallus, we specialize in helping clients navigate the complexities of estate planning and inheritance. Our experienced team can guide you through tax implications, trust setup, and the probate process to ensure your assets are protected and your wishes are honored. Contact us today to schedule a consultation and secure your legacy for future generations.
