Difference Between Inheritance Tax and Estate Tax in Pasadena, CA

Know the Difference: Inheritance and Estate Taxes in Pasadena

When planning for the future, it’s important to understand the different taxes that can affect your estate and your heirs. Two common taxes are the inheritance tax and the estate tax. Both sound similar, but they work differently and affect different people. People who inherit from an estate pay inheritance tax, while the estate pays estate tax before passing on anything. Since California has its own laws, understanding Pasadena’s inheritance and estate taxes is crucial.

California does not have an inheritance tax, but federal estate tax laws still apply to its residents, so planning ahead is necessary. Understanding these taxes can help you plan better for your estate and prepare your heirs for any taxes they might need to pay.

Short Summary

• If recipients inherit money, property, or other assets from a deceased individual, they pay inheritance taxes. Estate tax relates to the estate’s entire value before distribution, but inheritance tax is dependent on what the heirs receive. The amount owing depends on the inheritance’s worth and the beneficiary’s relationship to the deceased. Close relatives generally receive better rates or exemptions.
• California currently lacks both an inheritance tax and a state-level estate tax due to their repeal in 1982. There was a proposal in 2019 for a new estate tax (S.B. 378) that could have taxed estates over $3.5 million, potentially generating up to $1 billion annually. However, this bill has not progressed, and as of now, California residents do not face a state inheritance tax.
• Before passing on to heirs, a deceased person’s estate is subject to estate tax, also known as the death tax. This tax applies only if the estate’s value exceeds a certain limit set by law. Within nine months of the person’s death, often when grieving families are receiving less support from friends and family, estate taxes can be quite high, up to 40% in some cases.
• The federal estate tax is based on the right to transfer property upon death. An estate must pay tax before distributing its assets to heirs if its value exceeds a certain threshold. The state would receive the assets if the estate remains untransferred, a process known as “escheatment.”
• The estate itself bears the tax on the total value of the estate before distribution. Individual beneficiaries receive inheritance taxes, which vary in tax rates based on their relationship to the deceased. Estate taxes focus on the overall estate, whereas inheritance taxes are specific to what each beneficiary inherits.

What is an Inheritance Tax?

People who inherit wealth, real estate, or other assets from a deceased person pay inheritance taxes. Estate tax is levied on the deceased person’s estate before transferring it to the heirs, although inheritance tax is paid by the recipients. Most inheritance taxes depend on the inheritance’s value and the beneficiary’s relationship to the deceased. Spouses and children may enjoy lower tax rates or full exemptions than distant relatives or non-relatives.

Is there an Inheritance Tax in California?

Currently, California does not have an inheritance tax or any state-level death or estate tax; such taxes were repealed in 1982 through a voter decision. This situation has the potential to change in the future.

California proposed S.B. 378 in 2019 as a new estate tax. Although it appeared likely to be on the 2020 ballot, the vote on it has not yet taken place. If it had passed, it would have applied a new California Estate Tax, or “CA Death Tax,” to estates valued over $3.5 million for individuals. If enacted, this tax could have generated up to $1 billion annually.

Originally, the proposed 2020 California estate tax was designed to phase out if an estate reached the federal exemption level, meaning assets meeting the federal threshold would only pay federal estate tax, not both federal and California taxes.

The bill is currently not moving forward. California does not have a separate inheritance tax, so be wary of anyone who claims to offer solutions for “the California Inheritance Tax,” “California Death Tax,” or “California Estate Tax Exemption 2024.” Currently, California does not have such a tax.

What is an Estate Tax?

The United States imposes a death tax or estate tax on an estate based on its total value when someone dies. This tax only applies if the estate’s value is above a certain limit set by the law. Planning for this tax is an important part of managing an estate. While many states have their own estate or inheritance taxes, California does not have one. However, residents of California still have to deal with federal estate taxes.

Estate taxes are often debated. Some individuals argue that it’s inequitable to impose additional taxes on money that has already undergone taxation during its earning. Others think it penalizes people who have been successful. The idea of paying taxes simply because someone has died can also seem unjust.

The estate tax bill typically requires payment within nine months of a person’s death, exacerbating the situation. This means grieving families often face tax payments just as the initial support from friends and family is tapering off.

Aside from the fairness issues, the rules about estate taxes are always changing. State taxes can be very different from federal taxes, which can make the topic confusing for many people. In some cases, estate taxes can reach 40%. On top of that, state estate taxes can be as much as half of the federal amount, adding another 20%.

Federal Estate Tax

Technically speaking, the federal estate tax, also known as the “death tax,” is a tax on your ability to transfer property after death. You might be wondering, “What does that mean? I get that the IRS taxes my income or property, but can they really tax my rights?”

Yes, they can. Simply put, if you transfer your assets to your heirs, the government taxes you. If you didn’t pass on your assets, the state where you live would receive them, a process known as “escheatment.”

What’s the Difference Between Estate Taxes and Inheritance Taxes?

Most confuse estate taxes with inheritance taxes, which apply differently and have different timing. The estate tax levies a deceased person’s whole estate before distribution to heirs. The estate must pay this tax from its assets before distributing the rest.

Estate taxes are calculated on the estate’s overall value, including cash, real estate, assets, and personal property. Estate taxes only apply if the estate’s value exceeds a federal or state threshold. No estate tax is required if the estate is worth $10 million and the federal exemption is $12 million. If the exemption were $5 million, the estate would pay tax on the $5 million above it.

In contrast, inheritance tax taxes the value of recipients’ estate assets. Beneficiaries pay this tax based on their inheritance worth and relationship to the deceased.

Close relatives frequently receive lower inheritance tax rates or exemptions than distant relatives or non-relatives. If a beneficiary receives $1 million and the inheritance tax rate is 10%, they must pay $100,000. Estate tax considers the estate’s valuation, while inheritance tax considers each heir.

Contact Our Pasadena Tax Law Attorney Now!

Figuring out the difference between inheritance tax and estate tax is important for planning your estate, especially if you live in Pasadena, CA. While California doesn’t have an inheritance tax, if your estate is worth a lot, there are still federal estate tax rules to consider. The estate tax deducts from the total estate value prior to any distribution to heirs. On the other hand, the people who inherit the assets pay the inheritance tax based on what they receive.

Since these rules can be confusing, it’s a beneficial idea to get help from a professional. The Law Office of Daniela Romero offers free phone consultations to help you understand how these taxes might affect you and your estate. We can answer your questions and provide advice on how to handle your estate planning. If you want to make sure everything is done right and to avoid any tax problems, don’t hesitate to reach out to our Pasadena tax lawyers for legal help.