California Estate Planning 2026: No State Estate Tax, But Prop 19, Community Property, and 37.1% Capital Gains Change Everything

California eliminated its state estate tax in 1982 — so unlike residents of New York, Massachusetts, or Illinois, Californians face no state-level death tax. But California's planning challenges are uniquely severe in other ways. Proposition 19, effective February 2021, rewrote the rules for inheriting real estate — eliminating the Prop 13 reassessment exclusion for rental properties, vacation homes, and high-value primary residences. California taxes all capital gains as ordinary income at a 13.3% top rate, meaning a combined federal-plus-California rate of 37.1% on appreciated assets — making step-up-in-basis planning far more valuable here than in most states. And California is one of nine community property states, which under IRC §1014(b)(6) gives married couples a full step-up on both halves of all community property at the first death — one of the most powerful estate planning tools in the tax code, and one that most HNW California families dramatically underuse.

No California estate tax — but don't stop planning there

When clients move from New York or Massachusetts to California, their estate planners often note with relief that California has no state estate tax. That's true and meaningful — a $10M California estate owes zero state death tax, versus up to $1M+ in New York. Federal estate tax still applies if the estate exceeds the $15M federal exemption per person (permanent under OBBBA),³ but with portability and the $30M combined married-couple exemption, federal estate tax is now a concern only for the wealthiest families.

What fills the gap in California are three distinct planning challenges that are more acute here than almost anywhere else:

1. The Prop 19 trap: Californians who hold low-basis real estate under Prop 13's protective assessed values face a devastating reassessment on inheritance — unless they plan around it before death.
2. The 37.1% capital gains rate: California's refusal to grant preferential rates to long-term capital gains means appreciated assets face one of the highest combined LTCG rates in the world. Step-up in basis at death is a far more powerful tool in California than in low-tax states.
3. The community property double step-up: Most California families don't realize that all community property gets a full step-up on both halves at the first spouse's death — not just the deceased spouse's 50%. This creates powerful planning opportunities — but only if assets are correctly titled as community property.

Proposition 19: the most important California estate planning development since Prop 13

Before February 16, 2021, California's Propositions 58 and 193 allowed parents to transfer any property — their primary residence plus up to $1,000,000 in assessed value of other real estate — to children without triggering property tax reassessment under Proposition 13. A rental property purchased in 1975 for $80,000 might have a current assessed value of $120,000 and a Prop 13 annual property tax bill of $1,200. The heir received that same $1,200/year property tax bill regardless of the current fair market value of the property — often $2M–$5M+ in coastal California markets.

Proposition 19 eliminated this exclusion for all property except a primary residence. Since February 16, 2021, a parent's death transfers the Prop 13 assessed value only if the property is the parent's primary residence and the child establishes it as their own primary residence within one year of the transfer.⁴

What Prop 19 actually means — a worked example

Consider a Santa Barbara rental property purchased in 1978 for $150,000. Under Prop 13, it's been capped at modest annual increases. In 2026, the factored base year value (assessed value) is $280,000. The current fair market value is $2,400,000.

For a rental property or vacation home — where the child cannot or does not intend to make it a primary residence — Prop 19 means full reassessment at fair market value. On a $2.4M property with a $280K Prop 13 base, that's a permanent $26,500/year property tax increase. Multiplied across multiple properties in a typical California HNW estate, the lifetime impact on heirs is substantial.

Prop 19 planning strategies for California real estate

Strategy 1: Hold until death for the income tax step-up — but acknowledge the property tax cost

IRC §1014 still provides a full step-up in basis at death for California real estate. A property with a $200K cost basis and $3M fair market value has $2.8M in unrealized capital gains. At 37.1% combined CA+federal LTCG rate, selling during life costs $1,038,800 in taxes. Holding until death eliminates all of that. For capital gains purposes, holding is still often the correct answer — the step-up wipes out what Californians' high tax rates would otherwise take.

The tradeoff: the heirs inherit a stepped-up basis but a fully reassessed property tax bill. Whether this is acceptable depends on (a) whether heirs plan to hold or sell the property after inheritance, and (b) the ratio of accumulated capital gain to future property tax burden. If heirs plan to sell quickly after inheriting, the step-up + reassessment combination is optimal — zero capital gains tax, one-time reassessment, property sold and proceeds distributed.

Strategy 2: Lifetime transfer before death — but weigh carryover basis carefully

Gifting California real estate during life transfers the Prop 13 assessed value to the donee under Prop 19 rules for non-primary-residence property — but the recipient takes the donor's carryover basis for income tax purposes. There is no step-up in basis on gifted property.⁵ Gifting a property with $2.8M of embedded capital gain to a child preserves their Prop 13 assessed value, but also preserves $2.8M of capital gains that will be taxed at 37.1% when the child eventually sells.

This is the core Prop 19 tension: holding until death gives a step-up (no capital gains) but triggers property tax reassessment. Gifting during life preserves the low property tax but transfers the full capital gains burden. There is no free lunch. The analysis must weigh how long the child intends to hold the property, the current marginal rate, and the property tax differential over the expected holding period.

Strategy 3: GRAT or IDGT to transfer appreciation while managing basis and property tax

An IDGT installment sale (selling the property to an irrevocable grantor trust at the mid-term AFR of 4.08% in May 2026) transfers the property out of the estate without a gift, avoids capital gains on the sale under Rev. Rul. 85-13, and moves all future appreciation to heirs. However, a transfer to an irrevocable trust triggers Prop 19 reassessment because the property is no longer being transferred to a "child" — it's transferring to a trust entity. Careful drafting of trustee/beneficiary relationships and use of legal guidance is essential before using trust strategies with California real property.

Strategy 4: The QPRT for the primary residence

A Qualified Personal Residence Trust (QPRT) transfers the primary residence out of the taxable estate at a discounted gift value while the grantor continues to live in the home for a fixed term. For Prop 19 purposes, a QPRT transfer may trigger reassessment depending on the specific trust structure and whether the transfer qualifies as an "original transferor" exclusion. This is an area where California-specific trust drafting and a review of the BOE's QPRT guidance is essential before proceeding.

Community property: California's most underused estate planning advantage

California is one of nine mandatory community property states. Community property is all property acquired during marriage through either spouse's labor — wages, investment accounts funded with wages, real estate purchased with earnings. Separate property is what each spouse owned before marriage or received by gift or inheritance during marriage.

The estate planning significance of community property flows from IRC §1014(b)(6): when one spouse dies, the entire community property asset — both the 50% held by the decedent and the 50% held by the surviving spouse — receives a step-up in basis to the current fair market value.⁵

In common law (non-community property) states, only the deceased spouse's 50% of jointly held assets gets stepped up. The surviving spouse's 50% retains the original cost basis. In California, 100% of community property gets stepped up at the first death.

Common community property titling mistakes

The step-up requires that the asset actually be titled as community property at death. Many California couples inadvertently convert community property to separate property — or fail to establish community property status on assets acquired during marriage. Common errors:

• Retitling during life without documentation: Transferring a brokerage account to one spouse's name for administrative convenience without a written community property agreement can taint the community property characterization and lose the step-up on the survivor's 50%.
• Inherited or gifted assets commingled with community funds: Assets inherited or gifted during marriage are separate property. If those assets are deposited into a joint account that also receives wages, the commingled funds may lose their separate property character — or require tracing to reconstruct the community versus separate split.
• Moving from a non-community-property state: Assets acquired before moving to California — or acquired in California but from earnings generated in a non-CP state — may be quasi-community property, which receives step-up treatment but has slightly different rules at death and may be subject to the surviving spouse's right to one-half.
• IRAs and 401(k)s: Retirement accounts are funded with community property contributions but are titled in the employee's name. The community property character of these accounts matters for spousal consent rights and for the death-time step-up analysis. However, IRAs do NOT receive a step-up in basis at death under IRC §1014(c) (they are income in respect of a decedent, or IRD). The community property rules govern spousal rights, not the income tax basis rule, for retirement accounts. See the IRA estate planning guide.

The California Community Property Trust option

California permits spouses to hold property as community property in a trust structure — sometimes called a California revocable living trust with a community property provision. Under Fam. Code §761, trust property can be treated as community property if the trust instrument expressly states this. Properly structured, assets held in a revocable trust with a community property designation qualify for the IRC §1014(b)(6) full step-up just as if they were held outside of trust. This is the correct approach for most California married couples: a revocable living trust that holds community property and expressly maintains community property character throughout the trust's life. See the revocable living trust guide.

California income and capital gains tax: why the 37.1% rate matters

California taxes all capital gains — long-term or short-term — as ordinary income. There is no preferential rate for investments held longer than one year. At California's top marginal rate of 13.3% (applicable to income above approximately $1M for a single filer), the combined federal-plus-California long-term capital gains rate is:²

• 20% federal LTCG rate (top bracket)
• 3.8% net investment income tax (NIIT, applies above $200K single/$250K married)
• 13.3% California income tax
• Total: 37.1% on long-term capital gains

This rate makes several standard estate planning strategies dramatically more valuable in California than in zero-income-tax states:

Planning strategies driven by California's capital gains rate

Charitable giving with appreciated assets

Donating appreciated stock, real estate, or business interests to a donor-advised fund (DAF) or charitable remainder trust (CRT) eliminates capital gains entirely inside the charitable vehicle. In California, this saves 37.1 cents on every dollar of embedded gain — 56% more than in a zero-income-tax state. For a $10M portfolio with a $2M cost basis, the 37.1% combined rate means $2.97M in capital gains tax exposure. Donating the position to a DAF eliminates all $2.97M in tax while preserving the full $10M for charitable use. California HNW families should build charitable planning around appreciated assets as a primary strategy, not a secondary one.

Roth conversions with California timing

Roth conversions are taxed as ordinary income in both the federal system and in California. At a 13.3% state rate plus the 37% federal bracket, the combined marginal rate on a large Roth conversion can reach 50%. However, for California residents who plan to relocate to a no-income-tax state (Florida, Texas, Nevada, etc.), delaying the Roth conversion until after establishing domicile in the new state eliminates the 13.3% California income tax on the conversion — a 13.3-cent-per-dollar savings on every dollar converted. This requires genuine domicile change (not just spending fewer days in California) to withstand California's aggressive residency audits.

IDGT installment sales for business interests

California business owners with appreciated company interests face particularly severe capital gains exposure at sale. An IDGT installment sale — selling the interest to an irrevocable trust at the AFR (4.08% mid-term, May 2026) — defers recognition and removes appreciation from the estate, but the income tax on the interest payments is still paid by the grantor (at California's 13.3% rate). For pre-IPO founders or business owners anticipating a liquidity event, the IDGT strategy requires careful California-specific tax modeling to assess whether the deferral benefit exceeds the ongoing income tax cost to the grantor.

California dynasty trusts: the 90-year limit and why many families use out-of-state trusts

California maintains the Uniform Statutory Rule Against Perpetuities, limiting trust duration to approximately 90 years from creation (or the lives of specified individuals plus 21 years, whichever is shorter).⁶ For families seeking multi-generational wealth transfer spanning 100+ years — the goal of a true dynasty trust — California's rule creates a hard stop.

By contrast, South Dakota, Nevada, Delaware, and Wyoming have abolished the rule against perpetuities and permit trusts of unlimited duration. A California family with a $15M estate can establish a dynasty trust in South Dakota with South Dakota law governing, funded with assets that appreciate indefinitely and are never subject to federal estate or GST tax again (assuming the full $15M GST exemption is allocated at funding).

California-resident grantors can create these out-of-state trusts, but the rules are nuanced: the trust must have a meaningful connection to the chosen state (typically an independent South Dakota or Nevada trustee with actual administration in that state, not merely a nominee). California FTB also has rules on California-source income generated by trusts, so California business income or California real estate in the trust may still generate California income tax even if the trust is technically a South Dakota trust. See the dynasty trust guide for a state-by-state comparison.

Medi-Cal and long-term care: a 2026 California-specific issue

California's Medi-Cal program covers long-term care costs for qualifying individuals. Since 2024, California eliminated the asset-based eligibility test for many non-MAGI Medi-Cal programs — meaning assets in excess of prior limits no longer automatically disqualified applicants. However, beginning January 1, 2026, California is reinstating an asset-based test for many non-MAGI programs, including programs covering long-term care services and supports.⁷ Families planning for Medi-Cal eligibility now face a tighter window for asset repositioning.

Separately, Medi-Cal estate recovery remains in effect: California's DHCS (Department of Health Care Services) retains the right to recover from a Medi-Cal beneficiary's probate estate for services rendered to individuals age 55 or older who received long-term services and supports. Assets held in a properly structured trust at death pass outside probate — and outside the reach of Medi-Cal estate recovery. California's lookback period for Medi-Cal asset transfers is 30 months (shorter than the federal 60-month standard). See the long-term care planning guide for decision frameworks by net worth level.

California FTB residency audits: the real cost of "moving to Nevada"

California's Franchise Tax Board is one of the most aggressive state tax authorities in the country when it comes to residency audits. Californians who establish nominal domicile in Nevada or another zero-income-tax state while maintaining California ties face a high risk of the FTB asserting California residency — and California income tax — on their worldwide income.

Two separate California tax exposures apply:

1. Domicile: A person is a California resident if California is their permanent home — the place they intend to return to after any absence. Domicile is subjective and evaluated across multiple factors: location of family, business, social connections, real property, professional licenses, voter registration, and where they spend the most time.
2. Statutory residency: A person is taxed as a California resident regardless of domicile if they maintain a California "place of abode" (even a rented apartment) AND spend more than 183 days in California in the tax year. The 183-day rule can apply even to someone who has changed domicile — if they still have a California home and spend enough time there.

Common FTB audit red flags: spouse or children remain in California; primary business or clients remain in California; California home is not sold (even if rented out); California driver's license, bank accounts, or voter registration not updated; no documentation of Nevada or Florida days.

For high-net-worth Californians considering relocation to save both California income tax and potentially state estate tax (New York / Massachusetts), working with a California-domicile specialist to document the move, ensure the 183-day test is clearly met, and sever California ties is essential before filing a non-resident return. See the Florida estate planning guide for the relocation checklist that also applies to Nevada/Texas moves from California.

Case study: $12M Silicon Valley couple

Background: David and Linda, ages 61 and 58, live in Palo Alto. Combined estate: $12M — $4.5M primary residence (Prop 13 assessed value $900K), $3M rental property in the East Bay (Prop 13 assessed value $220K, FMV $3M), $3M concentrated tech stock (basis $180K), $1.5M retirement accounts. Two adult children; neither lives in the Bay Area. Combined state: California, no current plans to relocate.

Problem 1 — Prop 19 and the rental property: The East Bay rental has $2.78M in embedded capital gains. If David or Linda die, heirs inherit a stepped-up basis (no cap gains) — but also a $3M reassessed property tax value. The current Prop 13 tax is ~$2,750/year. Post-Prop-19 reassessment for the heirs: ~$37,500/year. Over a 10-year hold, that's $347,500 in additional property taxes — not counting the 2% annual increases. The preferred strategy: plan for the heirs to sell immediately after inheriting, capturing the step-up and paying zero capital gains, then deploying proceeds in a tax-advantaged structure.

Problem 2 — $3M tech stock at 37.1% LTCG: The $2.82M embedded gain in the stock would cost $1,046,220 in combined federal + CA capital gains tax if sold today. Options: (a) hold until death — step-up eliminates gain entirely (saves $1.046M); (b) fund a CRUT — donate the stock, eliminate 37.1% capital gains inside the trust, receive income stream for life; (c) gift to a DAF — eliminate gains and take a charitable deduction; (d) use a GRAT to transfer future appreciation above the 5.00% §7520 hurdle rate. David and Linda's charitable interest determines which approach fits best.

Problem 3 — Community property titling: David and Linda's $3M investment portfolio is in David's name alone from an era when he managed the family finances. If the portfolio was funded with community property earnings (wages during the marriage), it is community property regardless of how it's titled — but proving this requires documentation. Working with an attorney to confirm community property status and, if needed, execute a community property agreement ensures that both halves of the portfolio receive a full step-up at the first death. Without confirmation: at David's death, only 50% (his half) steps up. With confirmed CP status: 100% steps up — eliminating the entire capital gains tax bill on the portfolio at the first death.

Federal estate tax: $12M combined is below the $30M married-couple federal threshold. No federal estate tax planning is required at current estate levels. If the estate grows above $15M per person, strategies like SLATs, GRATs, and IDGTs become relevant. With California's no-estate-tax environment, the focus is entirely on income tax efficiency, community property preservation, and Prop 19 management.

Six California estate planning mistakes that cost families millions

1. Ignoring Prop 19 because "the plan was written before 2021." Any California estate plan written before February 2021 that contemplated passing rental properties, vacation homes, or multiple residences to children without property tax reassessment is now outdated. The Prop 58/193 exclusions no longer exist for those transfers. Plans must be reviewed and updated to address whether a step-up + immediate sale strategy, lifetime gift + carryover basis, or trust restructuring is optimal for each property.
2. Not confirming community property status of all marriage-era assets. Community property titling must be documented, not assumed. Assets in one spouse's name, assets commingled with pre-marriage separate property, or assets moved across state lines may have uncertain CP status. Without a community property designation, the step-up at the first death applies only to the decedent's 50% — leaving the survivor's 50% with carryover basis and full capital gains exposure.
3. Selling appreciated California real estate before death instead of donating or holding. At 37.1% combined LTCG, the capital gains tax on a $2M embedded gain is $742,000. Holding the asset until death eliminates the gain entirely via step-up. If the asset must be liquidated for diversification or liquidity, a CRUT or DAF donation eliminates the capital gains inside the charitable vehicle. Outright sale is often the worst tax outcome in California for appreciated real estate.
4. Establishing a nominal Nevada or Florida domicile without severing California ties. A Nevada LLC, Nevada driver's license, and 20 nights in Las Vegas is not domicile in Nevada for a person whose family, home, and business remain in California. California FTB audits high-income taxpayers who claim to have changed domicile and asserts California residency — with back taxes, interest, and penalties. Genuine relocation requires selling or renting the California home, moving family, relocating business relationships, and spending more days out of California than in it.
5. Using a dynasty trust governed by California law for multi-generational planning. California's 90-year RAP limit is a hard stop. For families seeking genuinely perpetual trusts, a South Dakota or Nevada trust with a real independent trustee in that state can provide unlimited duration — but must be properly administered out of that state to withstand California scrutiny. Using a California trust attorney to draft a "South Dakota dynasty trust" that is actually administered from a California office is a structural error.
6. Naming the estate (rather than individuals or a see-through trust) as IRA beneficiary. Particularly for California residents with large IRAs: naming the estate as beneficiary forces distribution through probate, makes the trust-as-beneficiary rules irrelevant, and typically results in a compressed 5-year distribution period — with California income tax at 13.3% on every dollar distributed. Named individual beneficiaries or qualifying see-through trusts achieve much better outcomes. See the beneficiary designations guide.