7 Inheritance Tax Myths California Families Need to Know

Short answer: California has no inheritance tax, estate tax, or gift tax of its own (Rev. & Tax. Code §13301), and the federal estate tax applies only above a $15,000,000 per-person exclusion for 2026 (26 U.S.C. §2010(c)(3)(A)). Most California families will never owe either. The taxes that do catch families are income tax on inherited property and property tax reassessment on the family home.

Most of what people believe about inheritance tax comes from other states, older law, or confusion between probate and taxes.

Law verified against Rev. & Tax. Code §§13301, 13302 and 63.2, 26 U.S.C. §§529, 1014, 1015, 2001, 2010, 2038, 2056, 2503, 2505, 2513, 2523 and 6019, Rev. Proc. 2022-32, and Rev. Proc. 2025-32, 2026. This is general information, not legal advice for your situation.

Myth 1: California taxes inheritances

It doesn’t. Since Proposition 6 in 1982, the state and its local governments have been barred from imposing any gift, inheritance, or estate tax (Rev. & Tax. Code §13301). The statute does keep a California estate tax equal to the federal credit for state death taxes (Rev. & Tax. Code §13302), but that federal credit, 26 U.S.C. §2011, has been repealed. With no credit, the California tax is zero.

If the person who died lived in another state, that state’s rules may differ. My estate and inheritance tax by state table covers them, and California estate tax in 2026 explains the California side.

Myth 2: My family will owe federal estate tax

Almost certainly not. The basic exclusion amount is $15,000,000 per person for 2026, indexed for inflation after that (26 U.S.C. §2010(c)(3)). Tax applies only to the taxable estate above the exclusion, at a top rate of 40 percent (26 U.S.C. §2001(c)).

Where families get surprised is in the count. The estate includes the house, retirement accounts, life insurance you own, and business interests, not just cash. Even so, at $15,000,000 per person, a family with a house, savings, and retirement accounts is nowhere near the line.

Myth 3: A living trust avoids estate tax

A revocable living trust avoids probate. It doesn’t avoid estate tax. Property you transferred to a trust you could revoke is included in your gross estate (26 U.S.C. §2038(a)). A large estate owes the same federal tax whether the assets pass through probate or through a living trust.

For married couples, the real estate tax tool is the marital deduction. Property passing to a surviving spouse is deducted from the taxable estate (26 U.S.C. §2056(a)), which usually postpones any estate tax until the second death. Trusts drafted to qualify for the deduction, such as a QTIP trust, are tax tools. A basic revocable trust isn’t.

Myth 4: Giving more than the annual limit means paying gift tax

For 2026, the first $19,000 of gifts to any one person is excluded from taxable gifts (26 U.S.C. §2503(b); Rev. Proc. 2025-32, §4.42). A married couple can elect to treat a gift by one spouse as made half by each, which doubles the figure to $38,000 per recipient, but both spouses have to consent (26 U.S.C. §2513(a)).

Give more than that and you generally have to file a gift tax return (26 U.S.C. §6019). Filing isn’t paying. The gift tax is offset by a credit tied to the same exclusion that applies at death, reduced by credit you used in earlier years (26 U.S.C. §2505(a)). In practice, no gift tax is due until your lifetime taxable gifts pass $15,000,000.

Some transfers don’t count against the exclusion at all, and some get a bigger one.

• Tuition and medical bills. Tuition paid directly to a school, and medical care paid directly to the provider, aren’t treated as gifts at all, in any amount (26 U.S.C. §2503(e)).
• A spouse who isn’t a U.S. citizen. The unlimited marital deduction doesn’t apply to gifts to a noncitizen spouse (26 U.S.C. §2523(i)(1)). Instead, the annual exclusion for gifts to that spouse is $194,000 for 2026 (Rev. Proc. 2025-32, §4.42). See non-citizen spouse and the estate tax.
• 529 plans. If you contribute more than the annual exclusion to a 529 plan in one year, you can elect to spread the gift over five years (26 U.S.C. §529(c)(2)(B)). At 2026’s figure that’s $95,000 per beneficiary, or $190,000 for a married couple splitting gifts.

More on giving is in gift tax in 2026.

Myth 5: A surviving spouse automatically gets the unused exemption

Portability lets a surviving spouse add the deceased spouse’s unused exclusion to their own. It isn’t automatic. The executor has to file an estate tax return that computes the unused amount and elects portability, even if no tax is owed, and the election can’t be made on a late return (26 U.S.C. §2010(c)(5)(A)).

There’s a fallback for estates that weren’t otherwise required to file. Rev. Proc. 2022-32 allows a late election on a Form 706 filed on or before the fifth anniversary of death. Estates that were required to file don’t get that relief. See estate tax portability in California.

Myth 6: Giving the house to the kids now saves them tax

Usually the opposite. Property you give away during life keeps your income tax basis in the recipient’s hands (26 U.S.C. §1015(a)). Property that passes at death generally takes a basis equal to its fair market value at death (26 U.S.C. §1014(a)). If you bought the house for $200,000 and it’s worth $1,200,000, a lifetime gift passes along $1,000,000 of taxable gain. An inheritance generally wipes it out.

Myth 7: No inheritance tax means no tax hit on the family home

Property tax is where California families actually feel it. Under Prop 19, a child who inherits a parent’s home keeps the parent’s assessed value only if the home was the parent’s principal residence, becomes the child’s principal residence within one year, and the child files for the homeowners’ or disabled veterans’ exemption within a year (Rev. & Tax. Code §63.2(a)(1)(A), (B)). Even then, if the home’s market value exceeds the parent’s taxable value plus $1,044,586 (the figure for transfers from February 16, 2025 through February 15, 2027), the excess is added to the new taxable value (Rev. & Tax. Code §63.2(d)). A rental property or vacation home gets no parent-child exclusion, because the exclusion covers only a principal residence or a family farm (Rev. & Tax. Code §63.2(a)). See the Prop 19 parent-child exclusion.

The seven myths at a glance:

Myth	What is actually true
1. California taxes inheritances	California has no state inheritance, estate, or gift tax (Rev. & Tax. Code § 13301)
2. My family will owe federal estate tax	Only above the per-person exclusion for 2026; most California families never will
3. A living trust avoids estate tax	It avoids probate; assets in a revocable trust are still in your gross estate (26 U.S.C. § 2038(a))
4. Giving more than the annual limit means paying gift tax	Only a gift tax return is required; no tax is due until lifetime taxable gifts pass the exclusion
5. A surviving spouse automatically gets the unused exemption	Portability isn’t automatic; the executor has to file an estate tax return and elect it
6. Giving the house to the kids now saves them tax	Usually the opposite: a lifetime gift keeps your basis, while an inheritance generally takes a date-of-death basis
7. No inheritance tax means no tax hit on the family home	Property tax reassessment under Prop 19 is where California families actually feel it

What matters for most families

For most California families, the useful question is whether the plan is set up correctly at all: a will or trust that says what you want, the right beneficiaries and fiduciaries, a funded trust, and a plan for the house under Prop 19. None of that requires a $15,000,000 estate. If your estate is near the exclusion, you’re married to a noncitizen, or you’re planning large gifts, build the plan around your actual numbers. My estate planning page explains how I work, by phone and Zoom with a mobile notary who comes to you for signing.