What Is the Estate Tax Exemption? The federal estate tax exclusion exempts from the value of an estate up to $13.61 million in 2024, up from $12.92 million in 2023. 1 Only the value over these thresholds is subject to estate tax.
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.
One type of trust that helps protect assets is an intentionally defective grantor trust (IDGT). Any assets or funds put into an IDGT aren't taxable to the grantor (owner) for gift, estate, generation-skipping transfer tax, or trust purposes.
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.
Irrevocable trust
Most trusts can be irrevocable. An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
An estate tax return is required if the gross value of the estate is over a certain threshold. For individuals who die in 2025, the threshold is $13.99 million (up from $13.61 million in 2024). Almost anything belonging to the deceased with a tangible cash value is included in the value of the estate.
Capital gains taxes: These are taxes paid on the appreciation of any assets that an heir inherits through an estate. They are only levied when you sell the assets for gain, not when you inherit.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
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.
Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return.
The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
By gifting assets to an irrevocable trust, you can remove those assets from your estate, thereby reducing estate taxes. You can define the beneficiaries and how the trust assets are to be used, while a trustee carries out the terms of the trust.
In addition, the estate and gift tax exemption will be $13.99 million per individual for 2025 gifts and deaths, up from $13.61 million in 2024. This increase means that a married couple can shield a total of $27.98 million without having to pay any federal estate or gift tax.
While beneficiaries don't owe income tax on money they inherit, if their inheritance includes an individual retirement account (IRA), they will have to take distributions from it over a certain period and, if it is a traditional IRA rather than a Roth, pay income tax on that money.
If you don't file taxes for a deceased person, the IRS can take legal action by placing a federal lien against the Estate. This essentially means you must pay the federal taxes before closing any other debts or accounts. If not, the IRS can demand the taxes be paid by the legal representative of the deceased.
Upon selling an inherited asset, if the inherited property produces a gain, you must report it as income on your federal income tax return as a beneficiary.
An estate tax is levied on the estate of the deceased while an inheritance tax is levied on the heirs of the deceased. Only 17 states and the District of Columbia currently levy an estate or inheritance tax.
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.
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).
The Loophole - The Intentionally Defective Grantor Trust
This means that the income generated by the trust is taxable to the grantor, but the trust's assets are not included in the grantor's estate for estate tax purposes.
A revocable trust can help avoid probate for assets that have been properly transferred into the trust during the grantor's lifetime. This can streamline the distribution of assets and maintain privacy.
If the current law is unchanged, as of Jan 1, 2026 the current lifetime estate and gift tax exemption will be cut approximately in half.