California Death Tax: Federal Exemption, Probate, and Penalties

California has no death tax. The state repealed its estate tax in 2005 and has never had an inheritance tax, so neither the estate nor the people who inherit from it owe anything to California at the state level.¹ What can still cost a family real money is the federal estate tax on estates above $15 million, a Proposition 19 property tax reassessment on an inherited home, and California’s statutory probate fees.

Why California Collects Nothing at Death

California’s old estate tax was a “pick-up” tax tied to a federal credit. When Congress phased that credit out, the state tax went with it, and the state death tax credit was fully eliminated on January 1, 2005. No California estate tax return has been required for anyone who has died on or after that date.¹

California also does not tax the recipient of an inheritance. About a dozen states do impose an estate or inheritance tax, so a California resident who inherits property located in one of those states could still owe tax there. Cash or property received from a California estate, by a California heir, is not taxed by California.

Federal Estate Tax in 2026

The one death tax that can still reach a California family is federal. For people who die in 2026, the first $15 million of an individual’s estate is exempt.² Only the value above that exclusion is taxed, at rates that start at 18% and top out at 40%.³

Married couples can effectively shield up to $30 million by using portability, which lets the surviving spouse claim the deceased spouse’s unused exemption. The $15 million figure was set by the One, Big, Beautiful Bill Act, signed on July 4, 2025, which replaced the scheduled sunset of the Tax Cuts and Jobs Act exclusion with a permanent baseline that will adjust for inflation in future years.² For the vast majority of California families, federal estate tax never comes into play.

How Lifetime Gifts Eat Into the Exemption

The federal gift tax and estate tax share a single $15 million exclusion. Taxable gifts you make while alive reduce what your estate can pass tax-free at death. Give away $3 million in taxable lifetime gifts and your estate exclusion drops to $12 million.⁴

The annual gift tax exclusion is a separate track. You can give up to $19,000 per recipient in 2026 without using any lifetime exclusion and without filing a gift tax return.² A married couple can combine to give $38,000 per recipient each year. Gifts above the annual amount are not immediately taxed; they simply chip away at the $15 million.

Deductions That Reduce or Defer the Federal Tax

Unlimited Marital Deduction

Anything left to a surviving spouse passes free of federal estate tax, with no cap.⁵ The tax is deferred until the second spouse dies. To keep the first spouse’s exclusion available for later, the survivor should file Form 706 to elect portability, even when no tax is owed.

Charitable Gifts

Money and property left to qualifying charities are fully deductible from the taxable estate.⁶ Charitable remainder trusts, which pay income to family for a period and then hand the remainder to charity, are one way larger estates combine family support with a deduction.

Life Insurance

Insurance proceeds paid to a named beneficiary are generally outside both the taxable estate and income tax. But if the deceased still held “incidents of ownership” over the policy at death, including the right to change beneficiaries, borrow against it, or cancel it, the full payout gets pulled back into the gross estate.⁷ People with large estates sometimes transfer policy ownership to an irrevocable life insurance trust to keep the proceeds out entirely.

The Community Property Step-Up in Basis

One of the biggest tax breaks for California heirs has nothing to do with estate tax at all. It’s the “step-up in basis,” and California’s community property rules make it more generous than in most states.

When you inherit an asset, its tax basis resets to fair market value on the date of death. Stock your parent bought for $50,000 that’s worth $500,000 when they die has a basis of $500,000 in your hands. Sell it the next day at that price and there’s no capital gains tax.⁸

In most states, when one spouse dies only the deceased spouse’s half of a jointly owned asset gets stepped up. California is a community property state, and both halves of a community property asset step up when the first spouse dies.⁸ A couple who bought a house for $300,000 that is now worth $1.5 million gets the whole property reset to $1.5 million when one spouse dies. The survivor can sell shortly after with little or no capital gains tax. The asset does need to be properly held as community property; joint tenancy alone may not qualify.

Proposition 19 and Inherited Property Taxes

California doesn’t tax inherited wealth, but it does reassess inherited real estate for property tax purposes under Proposition 19, and this catches many families off guard.

Before Proposition 19 took effect in February 2021, children who inherited a parent’s home kept the parent’s low assessed value no matter what they did with it. That protection is now much narrower. A child who inherits a parent’s home keeps the parent’s assessment only if the child moves into the home as their own primary residence and files a claim with the county assessor within three years of the transfer.⁹ If the child keeps the property as a rental or second home, the county reassesses it to current market value, which on a home held for decades usually means a dramatic property tax jump.

Even a child who does move in faces a value cap. If the home’s fair market value exceeds the parent’s assessed value by more than an inflation-adjusted amount (currently $1,044,586 through February 2027), property taxes partially rise to reflect the excess above that threshold.¹⁰ A separate exclusion applies to family farms and does not require the child to live on the property, though the same value cap still applies.

Grandparent-to-grandchild transfers use the same rules but only qualify if the grandchild’s parents (the grandparent’s own children) are deceased when the transfer happens.⁹ For many families inheriting long-held California homes, the Proposition 19 hit is far larger than any state estate tax would have been.

Probate Fees Are Often the Bigger Cost

Estates above California’s small-estate threshold of $208,850 generally must go through formal probate unless the assets have been placed in a living trust or otherwise structured to pass outside probate.¹¹ Assets held in joint tenancy, life insurance paid to a named beneficiary, retirement accounts with designated beneficiaries, and trust property are not counted toward that threshold.¹²

California sets statutory fees for both the attorney and the executor based on the estate’s gross value under Probate Code 10810:¹³

4% of the first $100,000
3% of the next $100,000
2% of the next $800,000
1% of the next $9,000,000
0.5% of the next $15,000,000
Above $25,000,000, a reasonable amount set by the court

The attorney and the executor each collect the full statutory amount, so the effective total is roughly double. On a $1 million estate that’s $23,000 for the attorney plus $23,000 for the executor, or $46,000 before court filing fees and any extraordinary costs. The calculation runs off gross value, not equity. A $1.2 million home with an $800,000 mortgage still generates fees based on $1.2 million. This is why California estate planners so consistently recommend living trusts for anyone who owns real property.

What the Executor Has to File

Federal Estate Tax Return

The executor must file IRS Form 706 if the gross estate plus lifetime taxable gifts exceeds $15 million. It’s due nine months after the date of death, with an automatic six-month extension available by filing Form 4768 before the original deadline.¹⁴¹⁵

A surviving spouse who wants to preserve the deceased spouse’s unused exclusion has to file Form 706 to elect portability, even when the estate falls well below the threshold and owes no tax.¹⁶ Missing that election can waste up to $15 million of exemption. An estate that wasn’t required to file and missed the original deadline can still make the portability election under a simplified late-filing procedure within five years of death.¹⁷

Income Tax Returns for the Estate

Any income the estate earns after the person’s death (interest, rent, dividends) is separate from estate tax and needs its own returns. Federally, the executor files Form 1041 when the estate has $600 or more in gross income for the year.¹⁸ California requires Form 541 when the estate’s gross income exceeds $10,000 or net income exceeds $1,000.¹⁹ The executor needs to obtain an Employer Identification Number for the estate before filing either.²⁰

Penalties for Missing a Deadline

The IRS charges a failure-to-file penalty of 5% of the unpaid tax for each month Form 706 is late, capped at 25%.²¹ Separate late-payment penalties and interest run alongside. On a large tax bill, those add up quickly.

Executors have personal exposure. A fiduciary who distributes estate assets to heirs before satisfying federal tax obligations can be held personally liable for the unpaid tax.²² The safer practice is to hold back enough to cover any potential liability until the IRS issues a closing letter or the statute of limitations runs. On the California side, failing to file Form 541 when required carries a penalty of up to 25% of the tax due.¹⁹ Mishandling probate deadlines can also lead the court to remove the executor, and beneficiaries who believe the estate has been mismanaged can petition the court and seek damages.

1
California State Controller’s Office. California Estate Tax
2
Internal Revenue Service. What’s New – Estate and Gift Tax
3
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
4
Internal Revenue Service. Estate Tax
5
Office of the Law Revision Counsel. 26 USC 2056 – Bequests to Surviving Spouse
6
Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
7
Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance
8
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
9
California State Board of Equalization. Proposition 19 Intergenerational Transfer Exclusion Guidance
10
California State Board of Equalization. Proposition 19 Fact Sheet
11
Judicial Branch of California. Probate Code Section 890 Adjusted Amounts
12
Judicial Branch of California. Check If You Can Use a Simple Process to Transfer Property
13
California Legislative Information. California Probate Code 10810
14
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
15
Internal Revenue Service. Instructions for Form 4768
16
Internal Revenue Service. Instructions for Form 706 (Rev. September 2025)
17
Internal Revenue Service. Revenue Procedure 2022-32
18
Internal Revenue Service. 2025 Instructions for Form 1041
19
Franchise Tax Board. Estates and Trusts
20
Internal Revenue Service. File an Estate Tax Income Tax Return
21
Internal Revenue Service. Failure to File Penalty
22
Office of the Law Revision Counsel. 26 USC 6901 – Transferred Assets