California families can reduce estate taxes through strategic use of trusts, lifetime gifting, and the step-up in basis before the 2026 federal exemption sunset.
Key Takeaways:
- Irrevocable trusts such as ILITs, GRATs, and charitable remainder trusts can remove assets from your taxable estate and provide significant tax savings for high-net-worth individuals.
- The annual gift tax exclusion allows individuals to give $18,000 per recipient tax-free each year, and direct payments for tuition or medical expenses don’t count against this limit.
- The federal estate tax exemption is scheduled to drop from approximately $13.61 million to around $6–7 million per person at the end of 2025, making now the ideal time to implement tax-saving strategies.
When most people think about estate planning, they picture wills and trusts—documents that determine who gets what after they’re gone. But a well-crafted estate plan does much more than distribute assets. It can also save your family significant money by minimizing the taxes that eat into your legacy.
At the Karpel Law Firm, we bring a unique perspective to estate planning. Lead attorney Darin Karpel holds both a law degree and a CPA license, which means we focus on both the legal and financial implications of your plan. In this post, we’ll break down key strategies that can help reduce your estate’s tax burden and keep more of your hard-earned wealth in your family’s hands.
Understanding the Taxes that Affect Your Estate
Before diving into strategies, it helps to understand what you’re up against. Several types of taxes can take a bite out of your estate if you don’t plan carefully.
The federal estate tax applies to estates exceeding a certain threshold. As of 2024, the federal estate tax exemption sits at approximately $13.61 million per individual. If your estate’s value exceeds that amount, the excess gets taxed at rates up to 40 percent. While that exemption sounds high, it’s scheduled to drop significantly in 2026 unless Congress acts, potentially falling to around $6 or $7 million per person.
California doesn’t impose a state estate tax, which is good news for residents. However, that doesn’t mean you’re off the hook entirely. Income taxes, capital gains taxes, and other levies can still affect the assets you pass on, depending on how your estate plan is structured.
Gift taxes also come into play if you transfer significant assets during your lifetime. The IRS allows you to give up to $18,000 per recipient annually (as of 2024) without triggering gift tax consequences. Anything beyond that counts against your lifetime exemption.
Understanding these taxes is the first step. The next step is building a plan that legally minimizes their impact.
Using Trusts to Your Advantage
Trusts are one of the most powerful tools in estate planning, and they offer several tax-related benefits when structured correctly.
A revocable living trust won’t reduce your taxes on its own. Since you maintain control of the assets, the IRS still considers them part of your estate. However, a revocable trust helps your family avoid probate, which saves time and money. It also lays the groundwork for more advanced planning.
Irrevocable trusts take things a step further. When you transfer assets into an irrevocable trust, you give up control over them. But in exchange, those assets are no longer considered part of your taxable estate. This can be particularly valuable for high-net-worth individuals looking to move appreciating assets out of their estate before they grow even larger.
Some specific types of irrevocable trusts designed with taxes in mind include:
- Irrevocable Life Insurance Trusts (ILITs): These remove your life insurance policy from your taxable estate, so the death benefit passes to your beneficiaries tax-free.
- Grantor Retained Annuity Trusts (GRATs): These allow you to transfer appreciating assets to heirs while retaining an income stream, potentially reducing or eliminating gift taxes.
- Charitable Remainder Trusts: These let you donate assets to charity while receiving income during your lifetime, with potential income tax deductions and estate tax benefits.
The right trust strategy depends on your goals, your assets, and your family’s needs.
Strategic Gifting
You don’t have to wait until you pass away to reduce your taxable estate. Gifting assets while you’re still alive can be a smart move, especially when done strategically.
The annual gift tax exclusion allows you to give up to $18,000 per person, per year, without any gift tax consequences. For a married couple, that means you could give $36,000 to each child, grandchild, or other recipient every year – completely tax-free. Over time, this adds up and moves substantial wealth out of your estate.
You can also pay tuition or medical expenses directly on someone’s behalf without those payments counting toward the annual exclusion or your lifetime exemption. If you have grandchildren heading to college or family members with medical needs, this strategy lets you help them while shrinking your taxable estate.
For larger transfers, you might consider using part of your lifetime gift tax exemption. This requires careful planning and the guidance of a knowledgeable attorney, but it can effectively pass on wealth before potential tax code changes reduce the exemption amount.
Maximizing the Step-Up in Basis
A tax benefit that often gets overlooked is the step-up in basis.
When you hold an appreciated asset, like stocks or real estate, and sell it during your lifetime, you owe capital gains tax on the difference between what you paid and what you sold it for. But when your heirs inherit that same asset after your death, they receive it at its current market value. If they turn around and sell it, they may owe little or no capital gains tax.
Smart estate planning takes advantage of this rule. In some cases, holding onto certain assets rather than gifting them during your lifetime makes more sense, so your heirs benefit from the stepped-up basis. In other situations, gifting might still be the better move. A CPA attorney can help you run the numbers and determine which approach saves your family the most money.
Planning for the 2026 Exemption Sunset
If you have a sizable estate, now is the time to act. The current federal estate tax exemption is historically high, but it’s set to decrease dramatically at the end of 2025. Without new legislation, the exemption could drop by roughly half.
That means assets that would pass tax-free today might face a 40 percent estate tax in just a couple of years. For families with estates in the $7 to $13 million range, this change could result in a significant and unexpected tax bill.
The good news is that you still have time to take advantage of the current exemption. Strategies like irrevocable trusts, spousal lifetime access trusts (SLATs), and strategic gifting can help you lock in today’s favorable rules. But these plans take time to implement properly, so don’t wait until the last minute.
Work with an Attorney Who Understands Both Law and Taxes
Estate planning sits at the intersection of legal strategy and financial planning. When your attorney only understands one side of that equation, you risk missing opportunities or worse, making costly mistakes.
At the Karpel Law Firm, we bring both perspectives to the table. Attorney Darin Karpel’s background as a lawyer and CPA means we approach your estate plan with a comprehensive view of how legal structures and tax consequences interact. We build strategies to protect your wealth and maximize what you pass on.
Our team has more than 50 years of combined experience helping California families navigate estate planning, and our AV Preeminent® rating from Martindale-Hubbell reflects our commitment to excellence.
If you’re ready to create an estate plan that minimizes taxes and protects your legacy, we’re here to help. Contact us for a free consultation, and let’s build a plan tailored to protect your family’s future.