In California, there is no state-level estate or inheritance tax. If you are a California resident, you do not need to worry about paying an inheritance tax on the money you inherit from a deceased individual. As of 2023, only six states require an inheritance tax on people who inherit money.
Beneficiaries of an inheritance in California typically do not have to pay income taxes on the inherited assets. That is because inherited assets are generally not taxable income for individual beneficiaries.
To avoid estate tax, you can set up a trust for your children, and put small amounts of money in it over time. Since they are not inheriting that money, they don't have to pay estate tax on it. They would, however, be subject to income tax on any money that goes to them.
Like the majority of states, there is no inheritance tax in California. If you are getting money from a relative who lived in another state, though, make sure you check out that state's laws.
As a beneficiary, you're entitled to the property after the owner's passing. In California, the terms of the trust dictate how the property is managed or distributed, which can simplify the transition without the need for probate court.
Many people worry about the estate tax affecting the inheritance they pass along to their children, but it's not a reality most people will face. In 2025, the first $13,990,000 of an estate is exempt from federal estate taxes, up from $13,610,000 in 2024. Estate taxes are based on the size of the estate.
The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
Ultimately, if your assets equal a significant amount of money, you should establish a trust rather than an inheritance for your beneficiaries. For more information on trust funds and inheritances, speak with one of our trusted and adept attorneys.
Are distributions from a trust taxable to the recipient in California? Generally speaking, distributions from trusts are considered income and, therefore, may be subject to taxation depending on the type of trust and its purpose.
Trusts are subject to a highly compressed tax bracket, reaching the highest federal income tax rate (37% as of 2024) once income exceeds $14,450. California's state income tax also applies to trust income, with rates as high as 13.3%.
Since California doesn't impose an inheritance tax, there is no need for an inheritance tax waiver form. Inheriting assets, whether it's property or other forms of wealth, does not trigger an inheritance tax liability in the state.
Key Takeaways. Funds received from a trust are subject to different taxation rules than funds from ordinary investment accounts. Trust beneficiaries must pay taxes on income and other distributions from a trust. Trust beneficiaries don't have to pay taxes on principal from the trust's assets.
As of 2024, this exclusion is set at $18,000 per individual. This means that you can give up to $18,000 in cash or property to your son, daughter, or granddaughter individually without concern for tax implications. If you and your spouse make a joint gift, the exclusion doubles to $36,000.
Elements Required to Create a Valid California Trust
California law requires the following three elements to be present to create a valid trust: The Settlor must properly manifest an intention to create a trust. There is trust property. There is a beneficiary (unless it is a charitable trust).
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income. Example: You inherit and deposit cash that earns interest income. Include only the interest earned in your gross income, not the inherited cash.
Deposit the money into a safe account
Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance.
Medium inheritance ($100,000)
If you receive a larger inheritance, first consider the recommendations above—fund an emergency savings account or pay off credit cards and loans. You can also use a portion of the money to pay off all or part of your mortgage or pay down student loan debt.
An exemption trust is a trust designed to drastically reduce or eliminate federal estate taxes for a married couple's estate. This type of estate plan is established as an irrevocable trust that will hold the assets of the first member of the couple to die.
While there is no such thing as an exit tax, California can still impose taxes on its residents that leave.
Trust Capital Gains Tax Rates
If a trust holds an investment for less than a year, the trust would pay short-term capital gains taxes at a higher rate. The federal capital gains trust tax rates on long-term gains for 2024 are: Up to $3,150: 0% Between $3,150 – $15,450: 15%
In California, there is no state inheritance tax. This means that when you inherit assets from a deceased person, you do not owe any tax to the state of California on those inherited assets.
This means that when the beneficiary withdraws those monies from the accounts, the beneficiary will receive a 1099 from the company administering the plan and must report that income on their income tax return (and must pay income taxes on the sum).
There are four ways you can avoid capital gains tax on an inherited property. You can sell it right away, live there and make it your primary residence, rent it out to tenants, or disclaim the inherited property.