When someone passes away, their loved ones often find themselves juggling emotions, paperwork, and financial concerns all at once. If you’re the one trying to settle a family member’s affairs (or planning ahead to prevent that burden for your own heirs), understanding how estate taxes work is an important element of what you’re doing.
In California, where property values and business holdings can push estate values well into the millions, it’s essential to have a clear picture of what the IRS and the state may claim. Knowing what counts toward the gross estate and how the tax gets calculated can help your family avoid surprises. Here’s how to determine whether estate taxes may apply and what you can do now to limit the cost later.
What’s Included in Your Estate?
Your estate is made up of everything you owned at the time of your death, with some caveats. That includes real estate, bank accounts, investments, personal property, business interests, unpaid loans owed to you, retirement accounts, and valuable collectibles. If you owned life insurance, the payout is also part of the estate total.
Items must be valued at fair market value, not purchase price, so even older assets like a home you bought 30 years ago will be appraised based on current market conditions. Professional appraisals are often needed for property, jewelry, and business interests to reflect what each is actually worth. Once everything is identified and valued, you have the starting point for calculating your estate tax liability.
Subtracting Liabilities and Charitable Contributions
The full value of your assets isn’t what gets taxed. Your estate is allowed to subtract certain debts and expenses before the final total is calculated. These include outstanding mortgages, credit card balances, and other valid debts at the time of death. The costs associated with settling the estate, such as legal fees, accounting costs, storage, shipping, court filings, and appraisals, are also deducted.
These administrative expenses usually amount to about 5% of the estate’s total value. If you made arrangements for charitable giving through a trust or will, the value of those gifts also reduces your taxable estate. Transfers to a surviving spouse avoid taxation entirely, as long as your spouse is a U.S. citizen. What remains after these subtractions is what the IRS and state authorities will examine when determining whether any tax is owed.
Comparing Your Estate’s Value to Federal and State Exemptions
The federal government doesn’t tax every estate, only those with a value that exceeds the federal estate tax exemption. For 2025, that exemption sits at $13.99 million per person, still temporarily inflated due to policies from the first Trump administration (and spouses can carryover the unused exemption of a predeceased spouse). If your estate stays below that number, there’s no federal estate tax. But if the value goes above it, the overage gets taxed at rates that can reach up to 40%.
California, unlike some other states, doesn’t charge a state-level estate tax. That’s good news for families here, but the federal side can still take a serious bite if you’re not prepared. What trips many people up is how easy it is to cross that threshold, especially when you include business holdings, real estate, retirement accounts, lifetime gifting, and life insurance proceeds. If your assets have appreciated or if you’ve spent years building a company, your estate might be worth more than you think.
Consider an example of a California business owner who dies in 2025 with an estate valued at $16.8 million. After subtracting $800,000 in debt, $300,000 in administrative costs, and $600,000 in charitable gifts, the estate is left with a taxable base of $15.1 million. Subtracting the $13.99 million exemption leaves $1.2 million subject to the estate tax. That amount is taxed on a sliding scale, topping out at 40%, which could mean roughly $480,000 owed to the IRS. With the right planning ahead of time, though, much of that tax could have been avoided.
Legal Strategies That Protect Your Legacy and Preserve Your Estate
If you’re looking to keep more of your estate in your family’s hands, the way your estate is structured matters. Our team at Dahl Law Group works with California business owners and their families to create tailored asset protection and estate strategies that reduce estate tax exposure and protect generational wealth. With the right planning tools, many of these tax hits can be reduced or avoided entirely. Contact our Sacramento or San Diego offices to structure your estate plan around what matters most to you.
Dahl Law Group
