Most California families do not have a federal estate tax problem. But for those who do — typically families with multiple properties, a successful business, and an estate approaching or exceeding the federal exemption — the tax consequences of doing nothing can be measured in millions of dollars. The strategies that reduce that exposure are specific, time-sensitive, and require careful coordination with the rest of the estate plan.
The federal estate tax applies to the portion of a taxable estate that exceeds the applicable exemption — $15 million per individual for 2026. The tax rate on that excess is 40%, and it is due to the IRS within nine months of death. California has no separate state estate tax.
In practice, the West Valley clients who face this exposure share a recognizable profile. They are not simply wealthy — they are asset-rich in ways that have compounded over decades. The most common situations I see:
For clients owning multiple properties, the most powerful estate tax reduction strategy combines a Family Limited Partnership or LLC structure with lifetime transfers of minority, non-controlling interests to children, grandchildren, or irrevocable trusts. See: Family LLC Planning
Once interests are transferred, post-transfer appreciation generally accrues for the transferees or trust beneficiaries — not the client’s estate. A property portfolio that doubles in value after the transfer does not double the estate tax exposure.
Properly structured minority interests in an FLP — limited partner shares with no management control and restricted transferability — may qualify for IRS-approved valuation discounts of 25% to 40%. A $10 million limited partner interest may be valued at $6–7.5 million for gift and estate tax purposes. At a 40% tax rate, that discount translates to significant tax savings.
Interests transferred to generation-skipping or dynasty trusts can pass future appreciation beyond children to grandchildren without being taxed at each generational level. Combined with the federal GST exemption, this strategy can remove significant wealth from the estate tax system permanently.
The FLP structure solves the succession question at the same time it solves the tax question. The general partner retains full management and control during their lifetime. The most capable heir receives a general partner interest. Other family members receive limited partner interests. The portfolio continues without the forced sale that a large estate tax bill might otherwise require.
For married clients, estate tax planning begins with ensuring that both spouses’ federal exemptions are fully usable. Two tools accomplish this:
A surviving spouse may use the deceased spouse’s unused exclusion amount — but only if a timely federal estate tax return is filed after the first death, even if no tax is owed. Portability is not automatic. Missing the filing deadline means losing the deceased spouse’s exemption permanently.
At the first spouse’s death, assets up to the available exemption — $15 million for 2026 — can be allocated to an irrevocable bypass trust. Future appreciation on those assets is excluded from the surviving spouse’s estate entirely. For a portfolio expected to appreciate substantially, the bypass trust is often more valuable than portability alone — because portability captures the exemption amount but not the future growth on those assets.
Several irrevocable trust structures serve specific estate tax reduction objectives. Each is covered in depth on the Irrevocable Trusts page — the brief descriptions here introduce the concept.
Transfers a valuable residence to beneficiaries at a reduced gift tax value while the grantor retains the right to live there for a specified term. Removes future appreciation from the taxable estate.
The grantor transfers appreciating assets to the trust while retaining a fixed annuity for a stated term. Appreciation above the IRS hurdle rate passes to beneficiaries with minimal gift tax cost.
Keeps life insurance proceeds outside the taxable estate while providing liquidity to pay estate taxes, fund a buyout, or support surviving family members — without those proceeds increasing the tax burden.
Many clients come in with a general sense that they need “asset protection” when what they actually need is estate tax planning — or vice versa. These are related but distinct disciplines.
How do we reduce the amount of federal estate tax paid out of this estate? Focused on reducing the taxable estate through lifetime transfers, valuation discounts, trust structures, and use of exemptions. The concern is the IRS, not creditors.
How do we structure ownership so that future creditors or lawsuit claimants have fewer assets available to collect? The concern is liability exposure, not estate taxes. Planning must happen before a claim arises — transfers made after a known liability may be challenged as fraudulent transfers.
The federal estate tax applies to taxable estates above $15 million per individual for 2026, at a 40% rate on the excess. California has no state estate tax. If your estate — including real property at full market value, business interests, retirement accounts, and life insurance — approaches or exceeds that threshold, estate tax planning is worth a conversation. If it doesn’t, asset protection and Medi-Cal planning are likely the more relevant concerns.
The current elevated exemption was established by the Tax Cuts and Jobs Act and is scheduled to sunset at the end of 2026 unless Congress acts. The exemption could drop significantly — potentially to half the current amount or less. Clients with estates that may be affected by a reduced exemption have a planning window that may be closing. This is one of the most time-sensitive issues in current estate planning.
Yes — and for many high-net-worth clients, the two are inseparable. A Family Limited Partnership, for example, can reduce estate taxes through valuation discounts while also separating business and rental property risk from personal assets. The key is ensuring the structure is designed to accomplish both objectives without compromising either.
At current exemption levels, federal estate tax planning is most relevant for estates approaching or exceeding $15 million. But the profile of West Valley clients who face this exposure is broader than many assume — a business owner with significant real estate, or a family that has owned commercial property for decades with substantial appreciation, may be closer to the threshold than they realize. A comprehensive estate plan review will identify whether estate tax exposure is a current or future concern.
Separately but importantly. Prop 19’s property tax reassessment rules determine what happens to the property tax basis when real estate transfers to the next generation. The estate tax rules determine what happens to the taxable value of that same real estate in the estate. The two analyses are distinct — different rules, different consequences — but the planning decisions that affect one often affect the other. They must be considered together.
A first conversation is straightforward. We review your estate, identify whether federal estate tax exposure is a current or future concern, and give you a clear picture of what planning strategies apply to your specific situation — and how they interact with your asset protection and Prop 19 planning. No obligation. Just an honest assessment.
