Tax Planning for California Estates

The taxes that matter most

For most California families, planning focuses on:

• Income tax basis — inherited property generally takes a basis equal to its value at death (Internal Revenue Code §1014); gifts carry over the giver’s basis (§1015).
• Capital gains — the difference between the sale price and the basis when heirs or donees sell.
• Property tax — reassessment of real property at a change in ownership, limited by Proposition 19’s parent-child rules.
• Income tax on retirement accounts — withdrawals from inherited traditional IRAs and 401(k)s are taxable income.
• Federal gift and estate tax — relevant only above the exemption of $15 million per person (2026).

The step-up in basis

When property is inherited, its income tax basis is generally reset to fair market value at the date of death (Internal Revenue Code §1014). A home bought for $300,000 and worth $1,100,000 at death can be sold by the heir for $1,100,000 with little or no capital gain. The same home given during life keeps the parent’s $300,000 basis, and the child could owe tax on an $800,000 gain (§1015). That difference is why lifetime gifts of appreciated property are often a mistake.

Community property and the double step-up

For married couples in California, both halves of community property generally receive a new basis at the first spouse’s death (Internal Revenue Code §1014(b)(6)), while only the decedent’s half of property held as joint tenants does. How a couple holds title — community property, community property with right of survivorship or joint tenancy — can make a large difference when the survivor sells. Documenting community property in a trust preserves its character.

Proposition 19 and the family home

Since February 16, 2021, the parent-child exclusion from property tax reassessment applies only to a family home that becomes the child’s principal residence within one year, or to a family farm, and only up to the parent’s taxable value plus $1,044,586 for transfers between February 16, 2025 and February 15, 2027 (the amount adjusts every two years). Vacation homes, cabins and rentals passing to children are reassessed to market value. The claim must be filed with the county assessor.

Gifting during life

The federal annual gift tax exclusion is $19,000 per recipient in 2026, and gifts above that use part of the lifetime exemption rather than creating tax for most people. Gifts of cash or high-basis assets can make sense; gifts of highly appreciated property usually cost heirs the step-up. Tuition and medical expenses paid directly to the school or provider are excluded without limit (Internal Revenue Code §2503(e)).

Inherited retirement accounts

Under the SECURE Act, most non-spouse beneficiaries who inherit an IRA or 401(k) must withdraw the entire account within ten years after the owner’s death, and each withdrawal from a traditional account is taxable income. A surviving spouse, a minor child of the owner, a disabled or chronically ill beneficiary and a beneficiary not more than ten years younger than the owner can use longer payout rules. Beneficiary designations — and whether a trust should receive the account — affect how much tax heirs pay.

Selling a home or a business

A married couple selling a principal residence can generally exclude up to $500,000 of gain ($250,000 for a single owner) if ownership and use tests are met (Internal Revenue Code §121), and a surviving spouse who sells within two years after the death can still use the $500,000 exclusion. Business sales raise questions of entity structure, installment sales and timing that are best addressed before a buyer appears.

Charitable planning

Charitable bequests are deductible for estate tax purposes, and naming a charity as beneficiary of a traditional IRA can be efficient because the charity pays no income tax on the withdrawal. A charitable remainder trust can pay income during life, defer capital gains on the sale of appreciated property and leave the remainder to charity.

Working with your CPA

Tax planning works best as a coordinated effort: the attorney drafts the documents and corrects title, and the CPA projects the income tax effects. Bring recent tax returns, property tax bills and account statements to the consultation so the plan reflects real numbers.