Is Inheritance Taxable in California?

Losing a loved one is never easy. If you’ve received an inheritance following the loss of a family member, you may be so overwhelmed and busy with other things that you end up feeling pressure to get the process going and make quick decisions about what to do with the money you’ve been left. However, whenever you receive a large sum of money, it’s important to ask the important questions to make sure you know all the relevant laws and procedures you need to follow during this transfer of wealth.

Is inheritance taxable in the state of California? We’re here to help you understand the ins and outs of receiving an inheritance from a loved one and whether, when, and how much you’ll be taxed on the money. Keep reading to learn more.

What Is Inheritance Tax?

Is an inheritance tax the same thing as an estate tax?

Inheritance tax and estate tax are two separate things. Estate taxes are taken from the remaining wealth of the deceased, while inheritance taxes are paid by beneficiaries. When someone dies, it’s possible that one, both, or neigher type of taxes apply.

Estate Taxes

Estate taxes are taxes on the right to transfer property after death, and are based on the “fair market value” of all the deceased individual’s assets. Types of property that can be included in a deceased person’s “Gross Estate” may include cash and securities, real estate, trusts, insurance, annuities, and other assets. There is a federal estate tax, which applies only to assets over $11.58 million, as of 2020, and ranges from 18% to 40%. Some states also have an estate tax (see a list of states with an estate tax here); however, California does not.

Inheritance Taxes

Unlike estate taxes, inheritance taxes are state taxes paid by beneficiaries on assets received from a loved one who has passed away. Inheritance is not generally considered income at the federal level, so there is no federal inheritance tax you need to worry about; however, some states impose inheritance taxes. Rules differ from state to state in terms of estate size and asset types that may be subject to inheritance tax.

Do You Have to Pay Inheritance Tax in California?

If you live in the state of California and your loved one has chosen to transfer their financial legacy and wealth to you after they’ve passed away, you’re likely wondering: do you have to pay taxes on inheritance? As of 2020, only six states impose taxes on inheritance money: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

California does not have an inheritance tax. However, while there is no direct tax on inheritance, you may be responsible for paying other types of taxes depending what you choose to do with the assets you received as your inheritance. Generally when you receive inheritance from a loved one, it’s not simply a cash deposit in your checking account. Instead, inheritance is usually received in the form of stocks, bonds, real estate, or other property.

If you choose to sell investments or real estate, for example, you’ll be subject to capital gains taxes, which are taxes on the growth in value of investments at the time of sale. This is just one type of tax you may need to understand and consider when making decisions about what to do with inheritance money.

That’s why, when you inherit, it’s a good idea to consider speaking with a qualified financial advisor who can help you understand your responsibilities and all your options when it comes to selling stocks, bonds, or real estate you may have inherited, maintaining investments, and planning strategically for your financial future.

Consult with an Expert Financial Advisor

Although inheriting wealth is a wonderful gift to receive from a loved one, it comes at a time that can be very stressful. It can be difficult to know what’s expected of you and how to move forward in a way that’s financially beneficial and right for you.

Our qualified financial advisors at Chatterton & Associates are here to help you understand how your loved one’s wealth will be transferred to you, what taxes and fees apply, and how to utilize your inheritance money in a way that benefits you financially and honors any communicated wishes of your loved one. We can help you make strong, strategic financial decisions with consideration and confidence that will help you build and preserve your wealth for the future.

Sincerely,

The Team at Chatterton & Associates

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.