What happens to your estate when you’re gone, and how will your loved ones inherit from you? In California, laws regarding estate planning dictate the parameters of how you can set up your plan and the tax consequences. See what’s changed.
According to Caring.com, only 42% of people in the United States have estate planning documents such as a will or living trust. But you’re the exception! You’ve taken the responsible and caring steps by preparing an estate plan in California, and you can control what happens next.
But it’s important to realize estate planning California laws do change over time. By revisiting this plan every three to five years, you can ensure you’re still making the best decisions for your estate.
Because honestly, this isn’t about the “stuff” or even a legacy! It’s about your loved ones, special needs loved ones in your care, minor children, and causes you support. A careful review of your plan allows for a smoother transition and peace of mind that you have your affairs in order.
Case in point, here are some of the big changes in just the last five years. How do these estate planning laws impact your current estate plan in California? What estate planning strategies might you use to have laws work in your favor?
Note: Each individual situation is different. This is not legal advice. It’s a discussion of possible estate planning strategies based upon the recent U.S. and California estate planning law changes. If you need legal advice, I recommend you speak with an estate planning attorney–like me.
SECURE Act and Retirement Accounts
The U.S. Congress passed this federal Act at the end of 2019 and caught us all by surprise! The Act was intended to make it easier to save for retirement. And it did: it raised the age limit for mandatory distribution from IRAs to 72 instead of 70 1/2. It also got rid of the age cap on contributions.
But at the same time, it’s less favorable for those inheriting these accounts. It eliminated the “stretch-out” income tax benefits for most inheritors, including most children. This had allowed children to stretch out distributions when inheriting a pre-tax retirement account such as an IRA. As a result, they could postpone paying taxes on most of the inheritance.
Before the SECURE Act, children could inherit an IRA and only withdraw Required Minimum Distributions (RMD) and pay taxes based on the child’s life expectancy.
After the SECURE Act, children must withdraw the entire IRA and pay all the income taxes within 10 years after inheritance. However, there are exceptions. And these are the ones I really want my clients to know about. They can make a huge difference in the money available to some of our most vulnerable beneficiaries.
For example, a disabled child (or his or her Special Needs Trust (SNT)) can be named as an IRA recipient. This allows them to stretch out the income tax benefits over the disabled child’s lifetime.
This has led many families to update their retirement account beneficiary designations to favor the disabled child’s SNT. If you do, you can take advantage of the tax savings (if you have a special needs child or adult). Many of my clients do since I specialize in setting up these more complex estate plans in California.
And understandably, it’s encouraged other clients to review their estate planning California and assess the impact of newer estate planning laws.
Proposition 19 and California Property Taxes
California voters passed this Proposition in November of 2020, and again caught us by surprise!
In this case, Prop 19 brought benefits to homeowners age 55 and older, who could retain their original property tax base while moving many times within California. However, the next generation will pay for this tax break.
There’s really no way to plan for this, unfortunately! But I do want you to be aware of this change.
Before Prop 19, parents could pass along a residence of any value and $1 million of the assessed value of non-residences to children without any reassessments.
After Prop 19, a residence can only be passed from parent to child without reassessment if the inheriting child lives in the house. And only the first $1 million increase in value is free of reassessment.
All non-residential property passing from parent to child is reassessed, period. This can lead to significant extra taxation upon inheriting non-residences.
Estate Taxes – Follow the Bouncing Ball!
Wow! where do I start?
In 2013, the estate tax exemption was set permanently at $5 million per person, indexed for inflation.
This amount doubled under the Trump tax cuts in 2017, to over $11 million per person.
However, these tax cuts are scheduled to sunset in 2026, and the exemption will drop to about $6-6.5 million per person (the amount it would otherwise be under the 2013 scheme, taking inflation into account).
Of course, I’m not recommending that you “aim” for that window that closes in 2026. Many of my clients are using the 2026 and after figures for the purpose of estate planning California-style.
Changes in Just 2021
It never ends. Here are some smaller but significant changes in California estate laws that have already happened in 2022.
The federal estate tax exemption has increased from $11,700,000 per person in 2021 to $12,060,000 in 2022. But keep in mind that this amount will drop to about ½ the amount ($6-6.5 mm) in 2026.
The annual gift tax exclusion has increased from $15,000 in 2021 to $16,000 in 2022.
For ABLE Accounts, this also means that you can transfer up to $16,000 per year into an account for a special needs adult if they qualify.
There have been lots of proposals in the House of Representatives for increasing taxes/reducing tax benefits. This continual push has alarmed many of my clients. But none of them have gotten traction so far. It looks like they won’t.
But there’s no guarantee. We’ve seen it happen before. Unfavorable legislation like this can get passed by being “hidden” in an unrelated spending bill. Few things are more frustrating than sneaky political agendas.
But no matter what happens, I want all my clients to know that you have options, and reviewing your estate plan every three to five years helps you take advantage of the ones that work in your favor while reducing the impact of others.
To start evaluating your estate plan, download our estate planning checklist.