by Monique Runge

Over the next 25 years, up to $72.6 trillion will be passed onto beneficiaries and nonprofit organizations from the silent generation to the boomers then over to the millennials who are estimated to inherit $90 trillion in assets. Many of the beneficiaries are not prepared to receive large amounts of assets and real estate, which can lead to mismanagement and costs that can significantly reduce the total amount received.

Some states have inheritance taxes, but NOT in California; finally, a benefit for living in the best state in the Nation!  Be aware there is still the IRS federal estate tax to factor in.  When you inherit assets from your parents in California, several legal and financial considerations come into play.

In California, inheriting assets from your relatives or friends typically does not trigger any immediate income taxes. However, there are several key tax considerations to be aware of:

• Federal Estate Taxes: The estate may be subject to federal estate tax if its value exceeds the federal exemption threshold, which was $12.92 million in 2023. Estates below this amount are generally not subject to federal estate taxes.

• Step-Up in Basis: The value of the inherited real estate is determined from the date of the decedent’s death. Once the real estate asset(s) sell, the capital gains tax is calculated on the amount of equity gained between the death of the decedent and the recorded sale date.  This is the biggest tax saver on real estate appreciation. 

• California Prop 13: In 1978 a law went into effect in California that will allow for a transfer of a primary residence between a parent and child or grandchild without reassessing the property tax basis of the home. The forms are available at the County assessor’s office to easily complete when preparing the deed to be transferred and recorded.      

Inheriting an estate, assets or real estate is a wonderful gift of wealth that should be properly managed to be proactive and maintain the value. There are several ways to reduce an inheritance tax basis that should be put in place by the living owner(s).   

Set up a revokable living Trust in the name of the estate holder that denotes the beneficiaries with instructions for asset distribution.  This protects the estate from entering Probate upon death of the last Trustee.  

Provide gifts to charity or to any number of people annually with a maximum annual tax-exempt amount of $17,000 per person/entity (up to $34,000 if married) allowable by the IRS in 2024. This will enable assets to be transferred annually with no federal tax implication while the donors are still alive.  

Fund a 529 custodial savings account in the name of a beneficiary/child that is designed specifically for education savings. Withdrawals can be taken from the 529 plan to pay for qualified educational expenses from elementary school through college levels and beyond. The plan withdrawals used for qualified purposes are not subject to federal income tax.

Invest strategically with a financial advisor who delivers the desired return on investment (short and long term) with also industry-specific investment advice. The top Fortune 500 companies vs. current investment trends in Bio, Tech and other trending profit makers. Inquire to hold cash assets into a Tax-Deferred account or a Roth IRA to avoid future taxes on wealth growth.  

Most mature family members have value in their real estate and retirement assets. It is imperative that good communication and proper planning for the future is mapped out in advance. Always consult with trusted advisors to learn how to best manage your family estate:  

• Obtain an estate planning attorney who specializes in California tax laws to set up the Living Trust.  

• Locate an “enrolled agent” tax preparer and advisor who can navigate the state and federal income tax implications specific to your situation.  

Employing these three trusted advisors will help ensure that you are making the most tax efficient decisions in the best interest of the estate and the beneficiaries.  

If you need a referral to a trusted advisor in any of these areas, please let me know. I only work with the best throughout California and am happy to assist. Feel free to share this information with someone who might find it valuable.