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Palm Springs Law Blog

Monday, January 9, 2023

How Do Inheritance Taxes Differ from an Estate Tax?

Inheriting assets is one of the cornerstones of estate planning. When you prepare to leave behind a legacy, you’ll likely want to set aside funds and property for your loved ones.

Unfortunately, taxes are often a key concern for the parties involved when it comes to inheritances. Inheritance and estate taxes may sound the same, but critical differences set these two taxes apart.

Any tax collected upon death by state and federal governments can significantly impact heirs and result in severe implications for loved ones. If you’re thinking about estate planning, you should know how taxation could affect your assets down the road and how you can protect yourself from expenses.

What is an inheritance tax?

For legal purposes, an inheritance tax is a special tax imposed upon individuals who inherit any property or assets, such as real estate. In these cases, individual states will look to collect a percentage of the total value whenever someone receives an inheritance, be it from a family member or a friend.

Fortunately, California is one of the many states that impose no taxes on inheritances. If you leave funds behind or inherit assets from a loved one, you don’t have to worry about paying a state tax. Under California law, inheritances are not considered regular income, so these are not handled under specific income tax laws.

The only exception to California’s inheritance tax applies to retirement accounts. If you inherit a loved one’s retirement account, it will still be subject to ordinary income tax when you transfer or withdraw funds.

What is federal estate tax?

Although individuals who inherit money aren’t liable for paying taxes in California, grantors and bequeathers should still expect to pay federally mandated taxes on their real estate. The federal government collects taxes on estates whenever these cross a particular value.

As of 2023, only estates worth $12.92 million or higher are subject to federal tax. If the total amount of your estate is less, you don’t have to worry about paying federal taxes.

Even if your estate has a high value, there are still many ways to protect your assets and legally avoid hefty federal taxes annually.

How to Reduce Estate Taxes in California

Many legal options can provide relief for individuals looking to bypass federal estate taxes, which can range from 18% to 40%.

Giving Cash Gifts

One of the easiest ways to lower the value of your estate is by giving annual gifts.

Current federal tax exemptions allow individuals to give up to $15,000 per cash gift without getting taxed. This number doubles to $30,000 if the gift is made to a married couple who files their taxes jointly.

Because of these exemptions, many people will make continuous gift donations to friends, families, and charitable organizations to lower the value of their estate and avoid federal taxes.

Establishing Trusts

Another way to reduce the total value of an estate is by establishing an irrevocable trust.

In California, you can allocate assets from your estate into a special trust, passed on to a trustee for management and oversight. While you still control the terms and functions of the trust, any tax liabilities and debt obligations are no longer enforceable against you.

There are many irrevocable trusts in California, so you’ll want to consult with a seasoned estate law attorney before making any significant financial decisions.

Partner with Palm Springs Estate Planning Attorneys

Heritage Legal, PC represents clients in estate planning matters throughout Palm Springs, CA. Whether you need assistance with estate administration, probate matters, or writing your will, our team is here to help.

Call our office today for a free consultation and case review.


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