Approximately one third of the states in the U.S. have some form of Estate or Inheritance Tax. California repealed its version of Inheritance Tax in 1982. However, the movement to bring back the California Inheritance tax is gathering unprecedented strength.
There is a move to put a proposition on the November 2018 ballot, titled “The College for All Act”. Approximately 585,000 signatures are due by June 13, 2018, in order to have the proposition on the ballot. Most observers are of the opinion that not only the measure will be easily placed on the ballot, but it will most likely pass as well.
The math is pretty simple. The UC system has 240,000 students, California State University has 480,000, plus another 134 private colleges that have as low as 15,000 to highs of 45,000 students per university. Considering the recent uproar about tuition increases across the country, gathering enough signatures to place the proposition on the ballot should not be a challenge.
Once on the ballot, then the question becomes if such measure would pass? Considering the “tax the rich and privileged” movement that has overtaken California for the past few years, as well as the outcome of the November 2016 election to extend the 1% surcharge on people making over $1,000,000.00 (to keep the top tax rate at 13.3%), it should not be difficult to obtain a 50% vote to amend the California Constitution and enact the State Inheritance Tax.
Let’s take a look at some numbers to better understand what the impact of the California inheritance tax would be:
Example #1: California single person with $5,490,000.00 estate dies in 2026, when the Federal exclusion is $6,500,000.00. Assume a Federal Estate Tax of zero. The California estate tax would be as follows:
$3,500,000.00 to $4,000,000.00 = $500,000.00 x 12% = $60,000.00
$4,000,000.00 to $4,500,000.00 = $500,000.00 x 15% = $75,000.00
$4,500,000.00 to $5,000,000.00 = $500,000.00 x 17% = $85,000.00
$5,000,000.00 to $5,490,000.00 = $490,000.00 x 20% = $98,000.00
California Inheritance Tax $318,000.00
Example #2: California single person with $6,500,000.00 estate dies in 2026, when the Federal exclusion is $6,500,000.00. Federal estate tax = zero. The California estate tax will be as follows:
$3,500,000.00 to $ 4,000,000.00 = $500,000.00 x 12% = $60,000.00
$4,000,000.00 to $ 4,500,000.00 = $500,000.00 x 15% = $75,000.00
$4,500,000.00 to $ 5,000,000.00 = $500,000.00 x 17% = $ 85,000.00
$5,000,000.00 to $ 5,490,000.00 = $490,000.00 x 20% = $ 98,000.00
$5,490,000.00 to $ 6,500,000.00 = $1,010,000 x 22% = $ 222,200.00
California Inheritance Tax $540,200.00
Example #3: California single person with $10,000,000.00 estate dies in 2026. Federal Eestate tax = $1,400,000.00 The California estate tax will be as follows:
$3,500,000.00 to $ 4,000,000.00 = $500,000.00 x 12% = $ 60,000.00
$4,000,000.00 to $ 4,500,000.00 = $500,000.00 x 15% = $ 75,000.00
$4,500,000.00 to $ 5,000,000.00 = $500,000.00 x 17% = $ 85,000.00
$5,000,000.00 to $ 5,490,000.00 = $490,000.00 x 20% = $ 98,000.00
$5,490,000.00 to $10,000,000.00 = $4,510,000.00 x 22% = $ 902,000.00
California Inheritance Tax $1,220,000.00
In other words, the state inheritance tax is almost as large as the federal!!
Example #4: California single person with $20,000,000.00 estate dies in 2026. Federal estate tax = $5,400,000.00. The California estate tax will be as follows:
$3,500,000.00 to $ 4,000,000.00 = $500,000.00 x 12% = $ 60,000.00
$4,000,000.00 to $ 4,500,000.00 = $500,000.00 x 15% = $ 75,000.00
$4,500,000.00 to $ 5,000,000.00 = $500,000.00 x 17% = $ 85,000.00
$5,000,000.00 to $ 5,490,000.00 = $490,000.00 x 20% = $ 98,000.00
$5,490,000.00 to $20,000,000.00 =$14,510,000 x 22% = $3,192,200.00
California Inheritance Tax $3,510,000.00
Example #5: California couple with $10,000,000.00 community property estate both die in 2024. Federal estate tax = zero. The California estate tax will be as follows:
$7,000,000.00 to $10,000,000.00 = $3,000,000.00 x 22% = $660.000.00
Example #6: California couple with $22,000,000.00 community property estate both die in 2024. Federal estate tax = zero. California estate tax:
$7,000,000.00 to $10,000,000.00 = $ 3,000,000.00 x 22% = $ 660,000.00
$10,000,000.00 to $22,000,000.00 = $12,000,000 x 22% = $2,640,000.00
California Inheritance Tax $3,300,000.00
Example #7: California couple with $50,000,000 community property estate both die in 2024. Federal estate tax = $11,200,000. California estate tax:
$22,000,000.00 $3,300,000.00
$22,000,001.00 to $50,000,000.00 = $27,999,999.00 x 22% = $6,160,000.00
California Inheritance Tax $9,460,000.00
For the most part, the numbers above assume that the current Federal estate tax exemption of $11,200,000.00 per person will survive the upcoming midterm and presidential elections in the next eight years. Take note that any of the following elections may create an early opportunity for a Democrat controlled congress and or president to reduce the estate tax exemption as we know it:
2018 Congress
2020 Congress and President
2022 Congress
2024 Congress and President
Assuming the current exemption is adjusted downwards by any President or Congressional vote, the tax outcome outlined above can become more adverse to the Taxpayer.
In light of the above, what do we do: Simple, take maximum advantage of the exemption available, while the exemption is in place and there is no California Inheritance Tax. There are still numerous alternatives available to the Taxpayer, to make transfers to various trusts and other suitable structures, continue to receive the income of the asset and have control over the asset, and ultimately have the beneficiaries avoid paying the Federal and State Inheritance taxes looming over them.
Grantor Trusts, Charitable Lead and Charitable Annuity Trusts, Private Annuities, and a host of other estate planning methods and measures are widely used to assure control of the assets in the hands of the parents while avoiding the catastrophic outcome of a 62% combined Federal and State inheritance tax.
