The estate tax is mostly a non-event. The income tax is not.
Federal estate tax, 2026 setting. The federal exemption is $15 million per individual — $30 million per couple with a proper portability filing. Above those thresholds, the federal rate is 40%. The long-scheduled 2026 sunset never happened: the 2025 tax law made the higher exemption permanent and indexed it for inflation going forward. Most California families will never owe federal estate tax — but portability still requires a timely Form 706 filing at the first death, and estates in the $10–$30M range should still plan actively. Exemption law has now changed three times in a decade, and what Congress grants, Congress can trim.
Step-up in basis. At death, taxable assets — brokerage positions, real estate — get a step-up in cost basis to fair market value on the date of death. Heirs can sell immediately and pay zero capital gains tax. This is the single biggest reason to hold appreciated assets until death rather than selling and paying 20%+ in gains tax during life — and because California is a community property state, both halves of community property get the reset, not just the deceased’s half.
In retirement, spend tax-deferred (Traditional IRA) and Roth dollars first, and save the low-basis brokerage stock for the step-up. A $2M stock portfolio with a $500K basis carries $1.5M of unrealized gain — a liability that simply disappears at death if the shares are still there. The withdrawal-order mechanics live on our tax-efficient withdrawal page.
Who actually gets what: the hierarchy. The will is the loudest document and the least powerful one. Asset by asset, here is what actually controls:
| Asset Type | What Controls It | Override? |
|---|---|---|
| 401(k) / 403(b) | Beneficiary form | Overrides will + trust |
| IRA / Roth IRA | Beneficiary form | Overrides will + trust |
| Life insurance | Beneficiary form | Overrides will + trust |
| Pension survivor benefit | Form filed at retirement | Irreversible once elected |
| Bank/brokerage POD/TOD | Form on file | Overrides will |
| Real estate deeded to trust | Trust terms | Avoids probate |
| Real estate held individually | Will | Goes through probate |
The SECURE Act trap — IRAs left to kids. Before 2020, an adult child could inherit an IRA and stretch withdrawals over their own lifetime — a huge tax benefit. The SECURE Act ended it: non-spouse beneficiaries must now drain an inherited IRA within ten years. For a $500K IRA left to a 50-year-old child earning $150K, that can mean a decade in the 32%+ bracket — the parent’s tax deferral converted into the child’s tax problem.
The fixes, in rough order of applicability: Roth conversions during life (heirs inherit tax-free); charitable remainder trusts; leaving the IRA to the spouse and the brokerage to the kids; and multi-generational permanent life insurance (including hybrid life/LTC structures) as a tax-free death benefit.
Trust structures worth knowing — beyond the revocable foundation:
- Revocable Living Trust (RLT) — the foundation for 99% of families. Everything above assumes it.
- Irrevocable Life Insurance Trust (ILIT) — keeps life insurance proceeds out of the taxable estate; relevant for families above the exemption.
- Special Needs Trust — for a child with a disability; preserves Medi-Cal / SSI eligibility while still providing for them.
- Dynasty Trust — multi-generational transfer, GST-tax exempt; typically sited in Nevada or South Dakota, not California.
- Charitable Remainder Trust (CRT) — converts appreciated stock into lifetime income with a charitable gift at death.
The estate tax will not touch most families on this page. Probate will — unless a trust is signed and funded — and a stale beneficiary form will decide more than the will does. The plan is five documents, one afternoon with an attorney, and a review of every beneficiary form you own. That last item is free, and it’s where we usually find the problem.
Get the estate plan stress-tested.
We walk through the current trust, every beneficiary form, and the insurance policies in one sitting. Most families find three to five things that need updating — an ex still on the 401(k) form, a trust unfunded since 2008, a primary residence never retitled. Fifteen minutes starts it, at your pace.
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