When planning for the future, one of the most important aspects to consider is how your estate will be taxed upon your passing. In California, understanding the estate tax exemption is crucial for effective estate planning. This article will explain what the estate tax exemption is, how it affects you, and what steps you can take to minimize potential estate taxes.
What Is an Estate Tax Exemption?
An estate tax exemption is the amount of money you can pass on to your heirs without them having to pay federal estate taxes. In California, there is no state-level estate tax, so only federal estate tax laws apply. The exemption amount is set by the federal government and can change over time.
Federal Estate Tax Exemption in 2025
As of 2025, the federal estate tax exemption is $13.99 million per individual. For married couples, this amount is doubled to $27.98 million. This means that if your estate is valued below these thresholds, your heirs will not owe any federal estate taxes. However, if your estate exceeds these amounts, the excess value may be subject to federal estate tax, which can be as high as 40%.
The Sunset Provision: What It Means for You
It’s important to note that the current high exemption amounts are set to decrease after 2025. The Tax Cuts and Jobs Act of 2017 includes a provision that will reduce the exemption to approximately $6 million per individual (adjusted for inflation) starting January 1, 2026. This means that if your estate is valued between $6 million and $13.99 million, you could face significant estate taxes after 2025.
How Does the Estate Tax Exemption Affect You?
Understanding how the estate tax exemption affects you depends on the value of your estate and your financial situation. Here are some scenarios to consider:
Scenario 1: Your Estate Is Below the Exemption Threshold
If your estate is valued below the exemption amount, your heirs will not owe federal estate taxes. However, it’s still important to have an estate plan in place to ensure your assets are distributed according to your wishes.
Scenario 2: Your Estate Exceeds the Exemption Threshold
If your estate exceeds the exemption amount, the excess value may be subject to federal estate tax. For example, if your estate is valued at $15 million, $1.01 million would be subject to estate tax, potentially resulting in a tax liability of over $400,000.
Scenario 3: Planning for the Future
With the exemption amount set to decrease after 2025, it’s crucial to plan. By taking steps now, you can minimize potential estate taxes and ensure your heirs receive the maximum benefit from your estate.
Strategies to Minimize Estate Taxes
There are several strategies you can employ to reduce estate taxes and protect your assets:
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Annual Gifting
One effective strategy is to make annual gifts to your heirs. In 2025, you can gift up to $19,000 per person per year without incurring gift taxes. Married couples can gift up to $38,000 per year per recipient. These gifts reduce the value of your estate and can help minimize estate taxes.
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Establishing Trusts
Setting up trusts can be an effective way to transfer assets while minimizing estate taxes. Trusts can provide control over how and when your assets are distributed, and some types of trusts can remove assets from your taxable estate.
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Charitable Contributions
Donating to charity can reduce the value of your estate and provide tax benefits. Charitable contributions made through your estate plan can lower estate taxes and support causes you care about.
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Life Insurance
Purchasing life insurance can provide liquidity to your estate, helping your heirs pay any estate taxes owed. By placing the life insurance policy in an irrevocable life insurance trust (ILIT), the death benefit can be excluded from your taxable estate.
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Review and Update Your Estate Plan
Regularly reviewing and updating your estate plan ensures that it reflects your current wishes and financial situation. It’s important to consult with an estate planning attorney or financial advisor to make necessary adjustments.
Working with Professionals in Orange County
If you’re in Orange County, California, working with professionals experienced in estate and trust tax matters can be invaluable. Donna L. Stern, C.P.A., offers specialized services in estate and trust tax planning. Her expertise can help you navigate the complexities of estate taxes and develop a plan that aligns with your goals.
Conclusion
Understanding the estate tax exemption and how it applies to your situation is essential for effective estate planning. By taking proactive steps now, you can minimize potential estate taxes and ensure that your assets are distributed according to your wishes. Consulting with professionals like Donna L. Stern, C.P.A., can provide the guidance and expertise needed to navigate the complexities of estate and trust tax planning in Orange County.
Note: The information provided in this blog post is for general informational purposes only and should not be construed as legal or tax advice. Consult with a qualified estate planning attorney or tax professional to address your specific circumstances.