Estate planning involves making decisions that can affect how much wealth your children eventually inherit. For California families with substantial assets, overlooking certain tax considerations may lead to unexpected financial consequences.
While California does not impose a state estate tax, federal estate tax rules can still affect larger estates. Recognizing common planning mistakes can help families make informed decisions about protecting their children’s inheritance.
1. Failing to plan for federal estate taxes
One common mistake is assuming that an estate will never exceed the federal exemption. Property appreciation, business growth and other changes in asset values can increase an estate’s taxable value over time.
Other mistakes that may affect the amount children inherit include:
- Overlooking lifetime gifts: Failing to consider available gift tax exclusions and exemptions can limit opportunities to transfer wealth efficiently.
- Ignoring life insurance: Certain life insurance proceeds may be included in the taxable estate, depending on ownership and policy arrangements.
- Neglecting spousal portability: Married couples may lose valuable estate tax benefits if the deceased spouse’s unused exemption is not properly preserved.
- Using outdated estate plans: Older documents may not reflect current tax laws, family circumstances or asset values.
Regular estate plan reviews can help identify potential tax exposure before it becomes a financial burden.
2. Overlooking trusts and asset transfers
Another mistake is assuming that placing assets in any trust automatically reduces estate taxes. Revocable living trusts do not remove assets from a person’s taxable estate. However, certain irrevocable trusts may offer tax planning advantages when properly structured.
Transferring property without considering the tax consequences can also create problems. For example, gifting appreciated property during life may cause children to lose the potential benefit of a stepped-up income tax basis at death.
Therefore, it is important to engage an experienced legal professional to help evaluate potential federal tax exposure and explain appropriate planning strategies.
