Learn About California Estate Tax Regulations

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You may be surprised to learn that California doesn't currently collect an estate tax at the state level. But, be aware that federal estate tax went into effect in 2018 for those estates valued at $11.8 million and above. This was a big jump, from $5.49 million, which was a part of new tax legislation under the Trump administration, signed in 2017.

Before major changes took effect to federal estate tax laws, things were much different at the state level. Pointing again to federal estate tax laws, just what do they have to do with California state estate taxes? Prior to Jan. 1, 2005, California actually did collect a separate estate tax at the state level, called a "pick-up tax," that was equal to a portion of the overall federal estate tax bill.

The Purpose of the Pick Up Tax

The "pick-up tax" is a state estate tax that is collected based on the state estate tax credit that the IRS allowed on the federal estate tax return, IRS Form 706, prior to Jan. 1, 2005. Each state had different tax laws for the pick-up tax, so the amount that a state would collect varied based on that state's own estate tax laws. In essence, however, the overall estate tax bill didn't increase or decrease as a result of the pick-up tax. Instead, the total tax bill was distributed between the IRS and state taxing authority.

What this means is that a portion of the federal estate tax was actually taken away from the IRS and instead paid to the deceased individual's state taxing authority. As such, prior to Jan. 1, 2005, if a deceased California resident owed federal estate taxes, then the California Controller's Office collected the pick-up tax from the deceased California resident's estate.

The Future of the California Estate Tax

Effective Jan. 1, 2005, the pick-up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA). In response to these changes, some states that used to collect a pick-up tax chose to enact laws that allow the state to still collect a state estate tax. This is referred to as "decoupling" since the states that enacted a state estate tax no longer based their state estate tax laws on current federal estate tax laws.

The majority of states did absolutely nothing and therefore no longer collect a state estate tax. California is unique because quirks in state law prohibit the legislature from enacting a California state estate tax without voter approval. In addition, while under the provisions of EGTRRA, the pick-up tax was supposed to return in 2011. It didn't due to the enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ("TRUIRJCA"), which reinstated federal estate taxes but didn't bring back the pick-up tax.

Nonetheless, the provisions of TRUIRJCA were set to expire on Dec. 31, 2012, which would have brought the pick-up tax back in 2013, but Congress and President Obama acted in early 2013 to pass the American Taxpayer Relief Act ("ATRA"). Under the provisions of ATRA, the rules governing federal estate taxes as set forth under TRUIRJCA were made permanent, which means that the pick-up tax was not resurrected in 2013 and will not come back in the future without further action by Congress.

Only with voter approval can California once again collect a state estate tax. And only time will tell if California's budget woes will lead to a push to reinstate a state estate tax since Governor Jerry Brown was counting on the pick-up tax to return in 2013 to bring some much-needed revenue back into the state. (For more information about the California estate tax, refer to the California Controller's Office website.)

California State Inheritance Tax Regulations

Similar to estate tax, California doesn't currently collect a state inheritance tax, or a tax assessed against the share received by each individual beneficiary of an estate. The difference with estate tax, is that it's assessed against the entire estate. California abolished the collection of a state inheritance tax on June 9, 1982.

NOTE: State laws change frequently and the following information may not reflect recent changes in the laws. For current tax or legal advice, please consult with an accountant or an attorney since the information contained in this article is not tax or legal advice and is not a substitute for tax or legal advice.