Darin Karpel, a California estate planning attorney and CPA, provides expert guidance on tax-efficient estate planning strategies. Learn how strategic gifting, irrevocable trusts, basis step-up rules, and retirement account planning can help your family minimize federal estate taxes and preserve generational wealth.
Key Takeaways:
- Use annual gifting to reduce estate taxes by giving up to $18,000 per person per year without tax consequences, removing significant wealth from your taxable estate over time.
- Implement irrevocable trusts for tax benefits, such as life insurance trusts to exclude policies from your estate and charitable trusts to reduce capital gains and estate taxes.
- Take advantage of basis step-up rules that reset inherited property values to current market prices at death, eliminating capital gains taxes on appreciated assets like California real estate.
Most people think estate planning is just about deciding who gets what after you’re gone. But if you’re not thinking about taxes, you could be leaving a lot of money on the table—money that should go to your family, not the IRS.
As both a certified public accountant and an attorney, Darin Karpel of the Karpel Law Firm has seen firsthand how the right tax strategies can save families tens of thousands, sometimes even millions, of dollars. The good news? You don’t need to be ultra-wealthy to benefit from smart tax planning. You just need to understand which tools are available and how to use them effectively.
Let’s walk through some of the most powerful estate planning tax strategies that can help you protect more of what you’ve worked so hard to build.
Understanding the California Tax Landscape
California doesn’t have a state estate tax or inheritance tax, which is great news for residents. But that doesn’t mean you’re off the hook when it comes to taxes and estate planning.
The federal estate tax exemption is currently $13.61 million per individual (or $27.22 million for married couples) as of 2024. That sounds like a lot, but here’s the catch: this exemption is set to drop significantly in 2026 unless Congress acts. It could fall to around $7 million per person, which means estates that seem safe today might face substantial tax bills in just a few years.
Even if your estate falls below the federal exemption, poor planning can still cost your heirs money through income taxes, capital gains taxes, and unnecessary probate fees. That’s where strategic planning makes all the difference.
The Power of Gifting: Reducing Your Taxable Estate Now
One of the simplest ways to reduce estate taxes is to give assets away while you’re still alive. The IRS allows you to gift up to $18,000 per person per year (as of 2024) without any gift tax consequences or even filing a gift tax return.
Here’s how this works in practice: if you and your spouse have three adult children, you could collectively gift $108,000 per year ($18,000 x 2 parents x 3 children) without touching your lifetime exemption. Over ten years, that’s more than $1 million removed from your taxable estate… and your children get to enjoy the money while you’re still around to see it!
Strategic gifting benefits:
- Reduces the size of your taxable estate
- Allows you to see your family benefit from your generosity
- No income tax consequences for the recipient
- Can be used to help family members with down payments, education, or business ventures
Just remember: once you give money away, it’s gone. Make sure you’re keeping enough for your own needs, including potential long-term care costs.
Trusts: Your Secret Weapon for Tax Efficiency
Trusts aren’t just for the ultra-wealthy; they’re powerful tools that offer tax advantages for many California families.
Revocable Living Trusts
While revocable living trusts don’t provide immediate tax benefits, they help you avoid probate, which can save your family thousands in court fees and administrative costs. They also give you flexibility to implement more advanced tax strategies later.
Irrevocable Life Insurance Trusts (ILITs)
Life insurance proceeds generally aren’t subject to income tax, but they are included in your taxable estate. An ILIT removes the life insurance from your estate while still providing your family with the death benefit.
Here’s a real-world example: if you have a $2 million life insurance policy and your estate is close to the federal exemption limit, that policy could push you over the threshold and trigger a 40% estate tax on the excess. By placing the policy in an ILIT, you keep that $2 million out of your taxable estate entirely.
Charitable Remainder Trusts (CRTs)
If you’re charitably inclined, a CRT lets you donate appreciated assets, receive a tax deduction, generate income for yourself or your beneficiaries, and ultimately benefit a charity you care about. It’s a win-win-win situation that can dramatically reduce capital gains taxes and estate taxes.
Taking Advantage of Basis Step-Up Rules
One of the most valuable but least understood tax benefits in estate planning is the step-up in basis. When you inherit property in California, the tax basis resets to the fair market value at the date of death. This can eliminate decades of capital gains taxes.
Let’s say your parents bought a house in Orange County in 1980 for $150,000, and it’s now worth $1.5 million. If they sold it today, they’d face significant capital gains taxes on that $1.35 million increase. But if they pass the house to you through their estate, your basis steps up to $1.5 million. If you sell it shortly after inheriting it, you’d owe little to no capital gains tax.
The key insight here: sometimes it makes more sense NOT to gift highly appreciated assets during your lifetime. Instead, holding onto them and passing them through your estate can provide enormous tax savings for your heirs.
Retirement Accounts Require Special Attention
Retirement accounts like IRAs and 401(k)s are often the largest assets in an estate, but they come with unique tax challenges. These accounts contain pre-tax dollars, meaning someone will eventually pay income tax on them.
The SECURE Act changed the rules dramatically. Most non-spouse beneficiaries now must withdraw the entire inherited IRA within ten years, which can push them into higher tax brackets and create a significant tax burden.
Strategies to minimize retirement account taxes:
- Consider Roth conversions during your lifetime to shift the tax burden to yourself at potentially lower rates.
- Name your spouse as the primary beneficiary to take advantage of spousal rollover options.
- Use trusts as beneficiaries for minor children or beneficiaries who need asset protection.
- Explore qualified charitable distributions (QCDs) if you’re over 70½.
As a CPA, I often run projections to determine whether paying taxes now through Roth conversions saves more money than leaving traditional IRAs to heirs. The answer depends on your current tax bracket, your heirs’ expected tax brackets, and your overall estate plan.
Business Owners Need Specialized Planning
If you own a business, estate planning becomes even more complex, and the tax stakes are even higher. Business interests can make up the majority of your estate value, and without proper planning, your heirs might be forced to sell the business just to pay estate taxes.
Tax strategies for business owners:
- Family limited partnerships (FLPs) or limited liability companies (LLCs) can provide valuation discounts
- Installment sales to family members spread the tax burden over time
- Grantor retained annuity trusts (GRATs) can transfer future appreciation out of your estate
- Key person life insurance can provide liquidity for estate taxes without forcing a business sale
These strategies require careful implementation and ongoing management, but the tax savings can be substantial—often running into millions of dollars for successful businesses.
Don’t Wait Until 2026 to Act
With the federal estate tax exemption potentially dropping in 2026, now is the time to act. If you have significant wealth, you have a limited window to take advantage of the current high exemption through gifting and trust strategies.
Even if you’re not near the exemption threshold, implementing tax-efficient strategies now gives you more options and greater flexibility as tax laws continue to evolve.
Work with a CPA Attorney for Comprehensive Planning
Estate planning is both a legal and financial matter. Working with an attorney who also understands tax strategy gives you a significant advantage. I’ve seen too many cases where well-meaning attorneys created technically correct estate plans that were tax disasters, or where CPAs gave great tax advice that couldn’t be implemented without proper legal documents.
The best estate plans integrate legal protection with tax efficiency, creating a comprehensive strategy that preserves your wealth for the people you care about most.
Protect Your Wealth with Karpel Law Firm
At Karpel Law Firm, we bring a unique perspective to estate planning. Attorney Darin Karpel’s background as both a CPA and an attorney means your estate plan doesn’t just check legal boxes; it’s designed with tax efficiency at its core.
With over 50 years of combined experience and an AV Preeminent rating from Martindale-Hubbell, our team has helped countless California families protect their wealth, minimize taxes, and create lasting legacies.
Contact us for a free consultation today. Let’s discuss how strategic estate planning can reduce your tax burden and keep more of your hard-earned wealth in your family where it belongs.