Estate Taxation

Estate taxation is an important part of every individual’s estate plan.  As an experienced Folsom estate planning law firm, we walk our clients through the fundamentals of estate taxation in California.  In the following paragraphs, you will learn about these fundamentals and we will go through a real-life estate taxation example. 

Levels of Estate Taxation

When an individual passes away and their assets pass to their beneficiaries, there is often a tax that has to be paid on that transfer.  Depending on which Folsom estate planning lawyer that you speak with, this tax will be called an “Estate Tax” or sometimes “Death Tax” or “Inheritance Tax.”  There are two levels of potential taxation; one at the federal level and another at the state level.  The federal taxation exclusion as of 2024 is $13,610,000 per person, which means that there will be no federal estate tax owed if the deceased’s estate is valued below this amount.  At the state level, California does not levy any separate estate tax. Therefore, estate taxation generally comes into play for larger estates.  

It is important to note that there is an “unlimited exclusion” at both the state and federal levels for an estate that passes to an individual’s spouse.  As such, even if an estate is worth $50m, there will be no tax owed by the surviving spouse.  However, it is important to note that when the remaining spouse passes away, their beneficiaries will then owe tax on any amount that exceeds the exemption levels.  Please see below for a handy federal estate tax chart.

Federal

Real-Life Estate Tax Planning Scenario

Trusts are a very popular tool for individuals both below and above the estate tax threshold, but have added benefits for those in the latter category.  Let’s take the example of Henry and Whitney, husband and wife, to explore how estate taxation works and how trusts can be an effective tool for families.

Let’s suppose that Henry and Whitney have a combined estate value of $25m and have two children, Chris and Clarissa.  This combined estate value is comprised of real estate, IRAs, vehicles and some personal property.  Let’s further assume that each spouse wishes for their entire estate to pass to each other and then when the remaining spouse passes away, that the estate will be equally split between their two children.

Let’s say that Henry passes away, leaving behind his wife and two children.  When Henry passes away, Whitney will not face any tax bill at either the federal or state level because of the unlimited marital exclusion, allowing Henry’s $12,500,000 estate (50% of the combined $25,000,000) to pass tax-free to his wife.  However, taxation arises when Whitney passes away.  When she does pass away, Chris and Clarissa will face a large federal estate tax bill.  For an inheritance of $25,000,000, the children will potentially pay an exceedingly large tax bill.

Let’s say that everything in the above example is exactly the same, except that Henry and Whitney approached an experienced estate planning law firm, such as Thapar Law, to plan their estate.  In such a case, we will use “A/B” or “credit shelter” tax planning that will allow each spouse to use their full individual estate tax exemption.  As such, when Henry passes away, our tax planning will allow Henry’s family to “use up” his $13,610,000 estate tax exclusion, leaving no taxable estate to pass to his children. This is because his half of the estate is $12,500,000, which is below the exclusion, allowing no taxable estate to pass.  We will do the same for Whitney, and use up her $13,610,000 exclusion, allowing no taxable estate to pass to her children.  When all is said and done, Chris and Clarissa, by taking advantage of our tax planning, will have a significantly lower tax bill, and potentially have no bill at all. The cost of setting up the living trust is a mere fraction of the potential tax savings.

To sum it up, estate taxation can play a very large role in properly setting up your trust and an experienced Folsom estate planning lawyer will focus on this area and see if it applies to your family’s financial profile.  If you have any other questions about estate tax, please give us a call or send us a message.