Categories
Estate Planning News Trusts

The Great Wealth Transfer: What California Families Need to Know About Inheritance Tax Rules in 2026

Source: The Art Newspaper

Who This Article Is For

If you’re a California resident managing family assets, planning your estate, or concerned about how inheritance taxes will affect your children’s financial future, this guide explains the complex tax landscape you’ll face in the coming decade. As Baby Boomers transfer an estimated trillions of dollars in wealth, understanding these rules now can save your family from unnecessary tax burdens and difficult decisions later.

Why Inheritance Tax Planning Matters More Than Ever

The so-called “great wealth transfer” is underway. As the Baby Boomer generation ages, experts predict that billion-dollar estate sales will become routine in the next decade. What was once a $100 million “meaningful sale” in 2016 barely registers today.

For California families, this creates both opportunity and risk. Without proper planning, your heirs may be forced to sell cherished assets—whether real estate, family businesses, or investment portfolios—simply to pay tax obligations.

How Do US Estate Taxes Work? A California Resident’s Guide

In the United States, estate taxes operate at both federal and state levels. Here’s what you need to know:

Federal Estate Tax Rules (2026)

  • Each person receives a lifetime exemption from estate and gift taxes of $15 million per person or $30 million per married couple
  • Estates valued above this threshold are taxed at up to 40%
  • This is a significant increase from the $13.99 million individual exemption previously in effect
  • California-Specific Considerations

    While California itself does not impose a separate state estate tax, if you own property or have business interests in states like New York, you may face additional state-level estate taxes with their own thresholds and rates.

    Understanding Capital Gains Tax on Inherited Assets

    Capital gains tax (CGT) adds another layer of complexity to inheritance planning. In the US, beneficiaries benefit from what’s called a “step-up in basis”—the inherited asset’s tax value resets to its fair market value at the date of death.

    Real-World Example:

    If your parent purchased California real estate for $200,000 in 1985 and it’s worth $2 million when they pass away, you inherit it at the $2 million valuation. If you later sell it for $2.5 million, you only pay capital gains tax on the $500,000 appreciation after inheritance—not on the full $2.3 million gain since original purchase.

    Why Professional Valuation Is Critical

    Getting an accurate, recent valuation is the first step in estate planning. However, many families are in for surprises:

  • Values can drop significantly: Assets purchased in the 1980s—antiques, certain types of furniture, some art—may be worth a tenth of their original price
  • Values can skyrocket: Collections assumed to be worth $100 million sometimes appraise for many times that amount
  • Undervaluation backfires: If you artificially lower valuations to reduce estate tax, the IRS may challenge this, and your heirs could face both additional estate taxes and higher capital gains taxes when they sell
  • The Hidden Challenge: When Heirs Can’t Afford to Keep Family Assets

    According to estate planning experts, the most common concern among collectors and asset holders is preserving their legacy while reducing the burden on their children. Unfortunately, “more often than not, the kids can’t afford to keep the collection—or just don’t want it—because it’s impossible to pay the estate tax obligations and keep the collection”.

    Case Study: The de la Cruz Museum

    Rosa de la Cruz created her own museum in Miami in 2009. When she died in February 2024, her husband Carlos closed the museum in March and sold off the entire collection to pay taxes and operating costs. As one expert noted, this is “a sad and cautionary tale about how what you want isn’t necessarily what your heirs want”.

    Children of devoted collectors sometimes feel resentful: “This was an obsession for so long, it took time away from me, I’m over it”.

    What Estate Planning Options Work for California Families?

    If you’re wondering “how can I protect my family from excessive estate taxes,” here are proven strategies:

    1. Lifetime Gifting Strategy

  • Give assets to beneficiaries while you’re alive, using your lifetime exemption
  • If you survive seven years after the gift, those assets avoid estate tax entirely (similar to UK rules)
  • Be aware: you may owe capital gains tax on appreciated assets when you gift them
  • 2. Creating a Private Foundation or Museum

  • Requires enormous endowment to fund operations in perpetuity
  • Only appropriate if heirs are committed to continuing the mission
  • Museums are becoming more selective about accepting gifts, making this option harder
  • 3. Strategic Sale During Your Lifetime

  • Some families choose to sell valuable assets while the original owner is alive “because they want to enjoy it”
  • You pay capital gains tax on the sale, then gift the proceeds to beneficiaries
  • If you live seven years after gifting the proceeds, your family pays only CGT (24%) rather than estate tax (40%)
  • 4. Professional Trust and Estate Planning

    Working with experienced California estate planning attorneys who understand both the legal structure and financial management aspects of wealth transfer is essential. They can help you:

  • Navigate complex federal and state tax rules
  • Structure trusts that protect assets for multiple generations
  • Create healthcare directives and powers of attorney
  • Ensure your wishes are honored while minimizing tax burdens
  • How UK and French Rules Differ (For International Families)

    If you have family connections or assets abroad, understanding international differences is important:

    United Kingdom

  • Tax-free threshold: only £325,000 (plus £175,000 for passing a home to direct descendants), after which 40% inheritance tax applies
  • Far more families face inheritance tax compared to the US
  • Gifts made more than seven years before death are free of inheritance tax
  • Acceptance in lieu scheme allows giving art to the nation in lieu of tax
  • France

  • Tax assessed per beneficiary, not on the estate as a whole
  • Children pay between 5% and 45%, while unrelated heirs can face rates up to 60%
  • Each child receives a €100,000 tax-free allowance
  • Forced heirship rules mean a fixed share must pass to children regardless of parents’ wishes
  • What Questions Should I Ask an Estate Planning Attorney?

    When meeting with an estate planning professional, California residents should ask:

  • What is the current fair market value of my estate?
  • How much of my lifetime exemption have I already used?
  • Will my heirs be able to afford the tax obligations while keeping key assets?
  • What trust structures make sense for my family situation?
  • How do I balance tax efficiency with my desire to preserve a legacy?
  • What happens if tax laws change before I die?
  • Take Action Now: Protect Your Family’s Future

    The great wealth transfer is already underway, and the families who plan ahead will preserve the most for the next generation. Whether you’re concerned about real estate holdings, business assets, investment portfolios, or family collections, professional guidance makes the difference between a smooth transition and a forced liquidation.

    California Probate and Trust, PC helps California residents navigate the complexity of estate planning and probate with transparency and compassion. Our experienced attorneys provide comprehensive estate planning services—from simple wills to complex trust structures—designed to protect your family and preserve your legacy.

    Schedule Your Free Estate Planning Consultation

    Contact California Probate and Trust, PC today for a no-obligation consultation. We’ll review your family dynamics, assess your estate planning needs, and help you choose the right strategy to protect what matters most.

    Visit cpt.law or call to speak with a qualified California estate planning attorney.

    Legal Disclaimer

    This article is provided for informational purposes only and does not constitute legal advice. Estate planning and tax laws are complex and subject to change. The information presented here is based on current federal tax law as of February 2026 and may not reflect the most recent legislative changes. Each family’s situation is unique, and the strategies discussed may not be appropriate for your circumstances. You should consult with a qualified estate planning attorney and tax professional before making any decisions regarding your estate plan. California Probate and Trust, PC is available to provide personalized legal guidance tailored to your specific needs and California residency status.