In order to understand estate taxes, it is important to know that California does not have an estate tax. Estates in California are subject only to the federal estate tax, but only 2 out every 1,000 estates owe any federal estate tax. Two reasons account for this low number of estates. First, there is a high exemption amount. Secondly, many people have taken advantage of the legal loopholes, and their estates are taxed on average about 16% of the net estate value and not the highest tax of 40%. This article will provide an overview of these points, and our office would be pleased to discuss this matter with you.
The estate tax calculation begins with the amount of the gross estate. The gross estate includes the fair market value of all property owned by the decedent and property they had an interest in. Proceeds from life insurance owned and controlled by the decedent are included as are annuity proceeds. Some exceptions do exist. For example, if securities owned by the decedent were purchased with taxable income, then only the increase in the value of securities is taxable. This also applies to the appreciation of the value of artwork and real estate.
The net estate value is calculated by subtracting several deductions from the gross estate value and after the allowed exemptions have been taken. The deductions include end-of-life expenses, funeral expenses, outstanding debts, the fair market value of property to be donated after death. The value of property that transfers to the spouse by the automatic rights of survivorship is also deducted.
After the net value of the estate has been calculated, the value of lifetime charitable gifts made to people and organizations, except to qualified tax-exempt organizations, that exceeded the annual exclusion for every year since 1977 must be added to the value of the estate to arrive at the net taxable value. These are the annual gift exclusions for tax purposes. However, there are other charitable gift exclusions that our office would be pleased to discuss with you.
The personal exemption level of $5.43 million is excluded from the remaining net fair market net value of the estate. This exclusion applies to anyone who inherits the assets of the estate. However, it usually applies to one person, but it will apply to each spouse who jointly inherit an estate.
A surviving spouse is entitled to the marital deduction which means that property inherited passes free of any estate tax. This deduction is not available to noncitizen spouses, but noncitizen spouse can use the personal exemption. The surviving spouse is also entitled to the personal exemption.
Special estate tax rules may apply to family business and businesses jointly owned with persons other than a spouse. Farms are may also be subject to special rules.
Disclaimer: This article is intended to provide a general summary of laws in the State of California and should not be construed as a legal opinion nor a complete legal analysis of the subject matter. Noelle Minto is an attorney at NM Law, APC in Tustin, California, a law firm specializing in Trusts & Estates and Business Transactions.