Estate Tax
None
Yes, but only for estates that exceed $13.99 million in value for individuals and $27.98 million for married couples (as of 2025).
Tax rates are between 18% and 40%, depending on the amount above the exemption.
The personal representative of the decedent’s estate is typically responsible for paying estate tax, and they must do so before making distributions to beneficiaries.
The majority of estates are exempt from estate tax.
Income Tax on Inherited Assets
There are no taxes imposed on inherited principal, but income generated after death is taxed at California’s standard income tax rates, which are between 1% and 13.3%.
There are no taxes imposed on inherited principal, but income generated after death is taxed at standard federal income tax rates, which are between 10% and 37%.
Examples of inherited income include dividends and rental income.
Inherited income is typically reported on beneficiaries’ individual tax returns the year it was received.
Capital Gains Tax on Inherited Assets
When an appreciated asset is inherited, its cost basis is generally stepped up to its fair market value at the date of death. This means that if the beneficiary sells the asset immediately, little to no capital gains tax may apply.
Both short- and long-term capital gains are taxed at California’s standard income tax rates, which are between 1% and 13.3%, depending on the beneficiary’s taxable income.
If a loss was incurred, that amount can offset other capital gains. If total capital losses exceed total capital gains, up to $3,000 of those losses can be deducted from taxable income each year, and any remaining losses can be carried forward to future years.
Because California treats all capital gains as ordinary income, this deduction can help reduce one’s state tax bill based on their income bracket.
When an appreciated asset is inherited, its cost basis is generally stepped up to its fair market value at the date of death. This means that if the beneficiary sells the asset immediately, little to no capital gains tax may apply.
When an investment is sold that’s been held for a year or less, any profit or loss is regarded as short-term.
When an investment is sold that’s been held longer than a year, any profit or loss is regarded as long-term.
To calculate a short- or long-term capital gain or loss, the cost basis must be subtracted from the sale price.
If a profit was earned in the short term, that amount is added to ordinary income and taxed at the standard federal income tax rate.
If a profit was earned in the long term, it typically is taxed at 0%, 15%, or 20%, depending on the taxpayer’s income bracket. Long-term capital gains are taxed at a lower rate than ordinary income.
If any losses were incurred, that amount can offset other capital gains, whether short- or long-term. If total capital losses exceed total capital gains, up to $3,000 of those losses can be deducted from taxable income each year, and any remaining losses can be carried forward to future years.
When a trustee distributes appreciated property to a beneficiary, the transfer itself is not taxable. If the beneficiary later sells the property, capital gains tax is owed only on the increase in value above the stepped-up basis (the fair market value at the decedent’s date of death).
Trust Income Tax
The trustee pays California’s standard income tax rates on undistributed trust income.
State income tax rates range from 1% to 13.3%, depending on the trust’s taxable income.
The trustee pays standard federal income tax rates on undistributed trust income.
Federal income tax rates range from 10% to 37%, depending on the trust’s taxable income.
Any trust income that is distributed to beneficiaries is taxed on both state and federal levels at the beneficiary’s individual tax rates.
