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Must-Know Facts About California Inheritance Law - Werner Law Firm

Must-Know Facts About California Inheritance Law

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Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: June 21, 2021

We leave something behind for our loved ones to inherit when we die. The basics of how inheritance law works remain the same throughout the United States. Our property and assets are distributed to our loved ones. Certain documents prepared before death (also known as an estate plan) can further specify how we want our […]

We leave something behind for our loved ones to inherit when we die. The basics of how inheritance law works remain the same throughout the United States. Our property and assets are distributed to our loved ones. Certain documents prepared before death (also known as an estate plan) can further specify how we want our property and assets to be handled and distributed after death.

A few other constants remain across state borders, such as that everything must be bequeathed and that which cannot be bequeathed (due to a lack of kin and no plan) will be inherited by the state. But beyond the basics, inheritance law can diverge significantly throughout different parts of the United States, especially regarding local and state taxes, probate proceedings, and even the specifics of who gets what if a deceased didn’t leave behind an estate plan of any kind.

California Inheritance Law and Costs

In California, inheritance is a matter between the decedent and their family – and there are very few interventions affecting most estates. Under current state inheritance law, there are no inheritance taxes or estate taxes, and many Californian estates don’t even require a full probate process. But, as with any other state, you still want to be a little prepared for the inevitable.

Intestate law and community property rules dictate how property and assets are divided into cases where no will or estate plan is present. This can lead to unwanted splitting of assets and property, and in the worst case, your bequeathment may partially pass to someone you haven’t had contact with within decades and never wanted to see again.

Even a simple estate plan can save you and your family from these grievances and give you considerable control over what your financial legacy should be. A lack of state taxes on death and dying doesn’t mean there are no taxes to worry about. Someone must file their final tax return (usually the decedent’s spouse, in a joint filing, or their executor).

There are also federal estate taxes to worry about. While there is no federal inheritance tax (i.e., children are not taxed by the federal government when receiving an inheritance). There is a federal estate tax, which ties into the federal gift tax. As a result, any estate larger than the current estate tax exemption limit will incur a tax rate of 40 percent on anything over the exemption.

The estate tax exemption is unified with the lifetime gift tax exemption limit. This means that whenever you gift more than the annual limit, the excess you’ve gifted will dip into your lifetime exemption limit (thereby cutting into your estate tax exemption limit). For 2020, the unified exemption limit was $11.58 million.

Over the last decade, it has been drastically increased and is slated to be altered with the current administration (though that doesn’t mean it’s guaranteed to be on the docket for this year or even the next). This means that estates with a total value (as evaluated at the date of death) underneath the current estate tax exemption limit do not need to worry about paying federal estate taxes (and will owe no state estate taxes in California, either).

Note that unexpected additions to an estate’s value can sometimes push an estate over the exemption limit, especially if we’re slated to return to pre-2010 levels. Life insurance policies are a good investment for most families that want to create a financial windfall for future generations and can massively pad out an estate once the policy payout arrives.

So be sure to incorporate these into your estate planning. Another cost to be wary of is the probate process itself. Probate can cost both time and money in the form of long waiting periods, attorney fees, filing costs, and paperwork. The larger and more complicated the estate, the longer the probate process.

To help smaller estates drastically cut down on the amount of money and time spent probating them, California allows expedited (shortened) probate processes for all estates that qualify as a small estate (total value under $166,250). One trick to help cut down on the burden of probate is to utilize different estate planning measures to immediately bequeath high-value portions of your estate after death, thus exempting them from the probate process. Living trusts and beneficiary designations are the most popular ways of doing this.

Community Property in California

California is a community property state, meaning everything you acquire after marriage is co-owned by your spouse. This is meant to simplify divorce proceedings by splitting all assets in half during a divorce, barring some kind of prenuptial or postnuptial agreement. However, this also plays a role in the death. Without an estate plan to dictate otherwise, everything co-owned by a decedent’s spouse automatically passes to them after death.

Community property states assume that all property owned by a married couple is jointly owned by the two, so the surviving spouse receives full control over the joint property. There are exceptions to what counts as community property in a community property state. Gifts and inheritances remain separate property; anything owned before marriage is also classified as separate property.

If you bought a condominium unit in your early 30s before marriage, it might not automatically belong to your surviving spouse after death. Separate property can become community property. This occurs through a process known as transmutation. If your spouse contributed heavily to paying off that condominium because you started financing it just before you met, for example, they may also be entitled to it.

Likewise, if you owned a cabin before you met, but your spouse invested significantly into its renovation, it can be argued that it became community property. An estate plan can give you further control over how your assets and property are handled after death, including whether you want them to be sold and the proceeds distributed equally or if you want the property to be kept in the family.

Why Bother With an Estate Plan in California?

Indeed, Californians don’t need to worry about inheritance law regarding taxes or estate taxes on smaller estates, but there are plenty of other things to worry about. But, again, an estate plan can help:

      • Dictate who should care for the kids if you and the other parent die.
      • Provide financial planning and asset protection for the inheritance of your minor dependents.
      • Dictate how your belongings should be invested, managed, and distributed after death.
      • Prepare for end-of-life financial and medical decisions that you might not be able to make when the time comes due to incapacity or dementia.

Estate plans allow you to develop contingencies for nearly any foreseeable issue or set up a simple set of documents to help guide your family’s decision-making when the time comes. You decide your involvement, and when working with a professional, your estate plan becomes a unique set of documents encapsulating your legal will and intent for your own legacy.

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