Gift Taxes versus Estate Taxes in Estate Planning

Estate planning and gift tax in California, like in other parts of the United States, are closely related because both involve the transfer of assets to heirs or beneficiaries. As an experienced estate planning lawyer in Folsom, I work with clients who have estates that may be subject to both estate and gift taxes. Here are key considerations regarding estate planning and gift tax in California:

California Estate Tax: California does not have its own estate tax that is separate from the federal estate tax. Whereas some states levy a state estate tax on estates valued above a certain amount, California is not one of these states. This means that regardless of the value of the estate, or assets and liabilities, there is no state estate tax.

California Gift Tax: California does not have a separate state gift tax. However, gifts made during your lifetime may have implications for your federal estate tax liability because the government may include lifetime taxable gifts when calculating the taxable estate.

Federal Estate and Gift Tax:

• While California does not have its own estate tax system, it is important to note that the federal estate tax and gift tax laws apply. 
• The federal estate tax applies to estates with a total taxable value exceeding a specific federal threshold, which is currently $13.61m as of 2024. This value refers to the value of the estate after paying all debts owed. 
• The federal gift tax is related to lifetime gifts and is part of the federal estate and gift tax system. Gift taxes are generally paid by the giver. You can make annual gifts up to a certain limit (the annual exclusion) without triggering the federal gift tax. This annual exclusion is $18,000 as of 2024. 
• The lifetime gift tax exemption is also $13.61m as of 2024. This comes into play when a gift is made in excess of $18,000 in a given year. If such a gift is made, the amount above the annual exemption would be applied toward the lifetime gift tax exemption.
  • As an example, let’s suppose that a parent makes a $1m gift in a given year to their child. Although this gift exceeds the $18,000 threshold, it will not be subject to tax. Rather, the parent’s lifetime exclusion would be reduced by $1,000,000-$18,000 = $982,000. As such, the parent’s remaining lifetime gift tax exclusion would be $13,610,000 – $982,000 = $12,628,000.

Estate Planning and Gift Tax Implications: Estate planning in California involves creating a comprehensive plan for the management and distribution of your assets, which may include strategies to minimize estate and gift tax liability. Some considerations related to estate planning and gift tax in California include:

1. Gifting Strategies: You can use the federal annual gift tax exclusion to make tax-free gifts to your heirs during your lifetime. Gifting strategies can help reduce the size of your taxable estate.
2. Lifetime Exemption: The federal estate tax exemption is high but subject to change. Estate planning may involve using the lifetime exemption to shelter assets from federal estate tax.
3. California Estate Tax Planning: As stated previously, California does not levy a separate state estate tax. Therefore, you only need to consider strategies to minimize or eliminate federal estate tax liability.
4. Trusts: Certain types of trusts, such as irrevocable life insurance trusts (ILITs) or grantor-retained annuity trusts (GRATs), can be part of an estate plan to reduce potential estate and gift tax burdens.

Conclusion

It’s important to note that tax laws can change, so it’s advisable to stay updated on the latest federal and state tax regulations and consult with professionals who specialize in estate planning and tax matters to create an effective and tax-efficient estate plan tailored to your specific situation. If you have any questions about gift taxes and estate planning, or are seeking representation from an experienced Folsom estate planning lawyer, contact Thapar Law at 916-579-0605 or send us a message.