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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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inheritance tax question

Customer Question

What is the percentage inheritance tax in California on living trust assets valued at $3M?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

Neither the U.S. nor CA has an inheritance tax. Thus, any inheritance you receive as a beneficiary is tax-free to you (assuming relevant estate taxes have been paid). In limited instances the U.S. and CA governments may attach beneficiary inheritances where the estates were subject to estate tax and failed to pay them prior to distribution to the heirs. However, should you ever inherit a tax-deferred account such as a 401(k) or pension account, any distributions you take would be subject to income tax the same as if the decedent owner took a distribution. If you inherit tax-deferred accounts seek competent tax counsel as you have siginificant choices to make regarding titling of the accounts and required distributions. Of course any investment income generated by the inherited funds (once you receive it) would be subject to normal taxation.


However, a decedents estate is required to file a Federal Estate tax return (Form 706) if as of the date of death the gross value of the decedents assets (including taxable gifts for the three prior years) exceeds $1,500,000 (for decedents dying in 2004 and 2005 and rising to $2,000,000 in 2006). The estate tax is calculated by applying a progressive rate schedule to the taxable estate (i.e. gross estate less allowable deductions) with rates ranging from 18 to 48%. A $3,000,000 taxable estate would generate about $700,000 (after reduction for the unified credit) in Federal etate tax. This is a preliminary calculation and is just for illustrative purposes.


California currently requires that an estate tax return (ET-1) be filed if a federal Estate tax return is required to be filed. CA levies what is called a "pick-up" tax which is equivalent to the former Federal credit for state death taxes. For CA purposes a $3,000,000 estate would generate about a $60,000 state death tax (and corresponding credit on the Federal estate tax return). Under IRC Sec. 2058 this tax may be deduction in calculating the Federal taxable estate.


Please note that since the Federal credit for state death taxes expired on 12/31/2004,California estate tax law is in a state of flux. Sacramento is currently considering several pieces of legislation that may alter significantly the state's estate tax landscape. Please also note that the U.S. congress is also considering siginificant legislation that will impact estate taxes in the near future. So if this is a serious issue for you you should try to keep abreast by contacting a qualified estate planner/attorney.


If the living trust was created by two grantor/spouses, both of whom are still surviving, then if property drafted (i.e. the trust provides for a credit shelter trust on the death of the first spouse) then there may be little to none estate tax due at the death of the second spouse, presuming the valule of the estate stays constant at $3,000,000. I strongly recommend you seek out a qualfied estate planning CPA or attorney to explain your existing estate planning and what other options you may have available.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.



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