Estate Planning and Newly Proposed California Estate Tax

The ballot on Election Day 2020 could ask California voters to authorize a new estate tax if a pending proposal is approved by the state senate. Senate bill 378 targets intergenerational transfers of assets by imposing a 40% tax on the estates of residents who die as of January 1, 2021, or after. The proposed law promises to require changes in the estate plans of California residents who thought their assets would pass to their loved ones free from the imposition of an estate tax.  Even though the law has not yet been approved in the Senate, it is important to understand the effects it could have on your estate plan should it pass and win voter approval.

Current State of Estate Taxes in California

Estate taxes are imposed on the value of the assets transferred as a consequence of the death of the owner. There is a federal estate tax and some states impose their own taxes as well. California voters abolished state-imposed taxes on estates in 1982 leaving only the federal estate tax affecting assets transferred as a result of the deaths of state residents.

Federal law currently imposes a 40% tax on estates, but exemptions limit the impact of the tax. Federal estate taxes do not affect estates where the value of the assets is less than $11.4 million. The exemption increases to $22.8 for married couples.

Individuals and couples whose wealth exceeds the federal threshold can limit their estate tax exposure through estate planning and asset preservation. The lack of a state-imposed estate tax in California means that existing estate plans could require revision in the event new taxes are imposed.

Overview of SB 378

Senate Bill 378 authorizes a 40% estate tax imposed on the estates of California residents dying on or after January 1, 2021. The proposed California tax provides a $3.5 million exemption or $7 million for a married couple before the tax would apply. However, because the state exemption is lower than the exemption under federal law, California residents who might avoid federal tax could end up owing state tax on their estates. There is no provision for the $3.5 million exemption to be increased by the cost of living as the federal exemption is.  That means that as the federal exemption is increased, the taxes paid to the state of California will increase.

According to the provisions of SB 378, estates valued above the exemption limits would be taxed at 40%. The tax only applies to the value of the estate up to the federal exemption. For example, an estate valued at $15 million would be exempt from State tax on the first $3.5 million. The tax on the remaining value of the estate would not apply to anything above the $11.4 million federal exemption. The reason for this, according to the sponsor of SB 378, is to avoid imposing both a state and federal tax at the same time. This could be little comfort for individuals faced with the prospect of paying estate taxes due to lower state-authorized exemptions exposing their estates to taxation.

It appears that there is no provision for a marital deduction.  That means that there would be an estate tax to pay to CA on the first death if the decedent’s half of the community and/or the decedent’s separate property exceeds $3.5 million.  Hopefully, this is an oversight that is corrected, but we’ll see.

If the Senate approves SB 378, it must go to the voters for approval before it can go into effect. The measure could appear on the ballot in 2020. We will monitor the progress of the proposed bill and update its status from time to time in our blog.  

Speak to an Estate Planning Attorney

It is premature to make changes to estate plans based on the proposed CA estate tax.  However, it is never too early to start thinking about the effects of the proposed changes and discussing them with an estate planning attorney so that you understand the planning options that will be available to mitigate the effect of the new tax. At Magee & Adler, our attorneys can review your current estate plan and advise you about how a California estate tax would affect it and options for minimizing its impact on your estate. Call us now at 562-432-1001 to schedule an appointment.

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