In recent years, Californians have not had to worry about estate taxes but this could change in the near future. The California legislature has recently introduced a bill (SB 378) which would require gift, estate and generation-skipping transfer taxes during life and at death after December 31, 2020.1 The proposed bill will tax the fortunes of some of California’s wealthiest residents while they are alive and after they die.
Current California law mandates voter approval for any change that imposes transfer taxes. If the California legislature approves the proposed bill, Californians will have the opportunity to vote on the changes in the November 2020 election.
In the past, California imposed a “pick up tax”, which was the equivalent to the credit for state death taxes allowed under federal law. In 2005, federal tax legislation phased out this credit, which effectively eliminated any California estate tax.
In the proposed bill, all California transfer taxes will be imposed at a 40% rate but the good news is that taxpayers will be granted a credit for transfer taxes paid to the federal government so they will not suffer from double taxation. Under federal rules, the basic exclusion amount for each type of transfer is $11.4 million and is adjusted for inflation. But under the California proposed bill, the basic exclusion amount for each type of transfer will be $3.5 million and will not be adjusted for inflation.
In its current form, the California bill applies to estates larger than $3.5 million for single residents or $7 million for married couples, which would be garnished at 40 percent postmortem. These taxes often come out of the inheritance left to survivors, which are sometimes referred to as “inheritance taxes.” But, since the tax applies to cases without a specified benefactor, the more accurate term is estate tax.
With federal exclusion rates increasing each year, forward-looking estate planning techniques to minimize such taxes has become a need that few have had to experience. But if the California bill passes, anyone with assets valued over $3.5 million may be subject to a 40% California transfer tax during life or at death. In addition, with a full credit for federal transfer taxes, only estates between $3.5 million and $11.4 million would be impacted under California tax. What this means to Californians is that an estate worth $100 million would only be required to pay the same California estate tax as someone with an estate of $11.4 million.2
The goal of the bill is to impose transfer taxes on wealthy Californians equal to what they would have paid prior to the implementation of increased exemption rates at the end of 2017. The bill also proposes the creation of the Children’s Wealth and Opportunity Building Fund, which is a special fund in the State Treasury to finance programs designed to help address socio-economic inequality. All taxes, interest, penalties, and other amounts collected would be deposited into the fund to build assets among people that are in need.3
Understanding the impact of estate taxes is an important step to to securing your family’s financial future. The next step is deciding on the right lawyers. The attorneys at Velasco Law Group have the estate planning expertise and and will work with you to come up with the right solutions. Take the most important first step to begin planning for the future and contact the Velasco Law Group at one of their three Southern California locations in Long Beach, Downey or Irvine.
Long Beach Office:
We have very nice office located near the Governor George Deukmejian Courthouse and very close to a variety of restaurants in Downtown Long Beach. If you are travelling in from another city, there are many beautiful hotels and Long Beach airport is nice relaxed and trendy airport. The oceanfront is only minutes away by car from our office location.
Our office in Downey is located strategically so that traffic from several freeways lead to this beautiful City. We have the 5, 405 and 710 Freeways, a great escape for Los Angeles residents who crave some Cuban cuisine or delicious Portos Bakery.
We are in the heart of Irvine’s business district, off the 405 Freeway. We welcome all Orange County residents, visitors from San Diego and the Inland Empire as well.
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