Tax Planning Guide
California eliminated its state estate tax on January 1, 2026. Here's the complete breakdown of which living trust tax benefits survived — and which ones still justify the cost of a California living trust.
California's state estate tax is gone — eliminated January 1, 2026. For most California homeowners, the tax case for a living trust is now driven by two benefits: stepped-up cost basis at death (saving heirs $40,000–$120,000+ in capital gains taxes) and California's community property 100% step-up rule (unique to community property states, saves $40,000–$80,000 over common law states).
For high-net-worth estates approaching the federal exemption ($13.99M per person), credit shelter trusts within a living trust protect the exemption across generations. For the typical San Diego homeowner with $600K–$1.2M in real estate, the stepped-up basis benefit — not estate tax avoidance — is the primary financial reason to establish a living trust.
A living trust is primarily an estate administration tool, not an income tax vehicle. But at death, it unlocks two significant tax benefits that a simple will cannot reliably deliver.
| Tax Benefit | Without Trust Will only |
With Living Trust HomeTrust $309 |
|---|---|---|
| Federal estate tax exemption ($13.99M/person) | ✓ | ✓ |
| Stepped-up cost basis at death | Incomplete — assets outside trust may miss step-up | ✓ Full basis step-up for all trust assets |
| Community property 100% basis step-up (CA unique) | Requires separate spousal property designation | ✓ Built into trust structure for community property |
| Credit shelter trust (preserves exemption for children) | ✗ | ✓ A/B trust structure available |
| Privacy (trust terms not public record) | ✗ Will enters probate — becomes public | ✓ Trust terms remain private |
| Avoids California probate ($34K+ on $800K estate) | ✗ Required for assets over $184,500 | ✓ No probate required for trust assets |
Ranked by typical dollar impact for a San Diego homeowner with a $900,000 home.
At death, assets in your trust receive a full stepped-up basis to fair market value. If you bought your home for $220,000 and it's worth $900,000 at death, your children inherit with a $900,000 basis — saving potentially $68,000 in capital gains taxes on a future sale.
Saves $40K–$120KVaries by asset value and original purchase price
California's community property law gives the surviving spouse a 100% step-up in basis for all community property. In most other states, only 50% gets a step-up. For a $1.2M community property home, this California advantage saves $34,000–$68,000 over non-community property states.
Saves $34K–$80KUnique to California and 8 other community property states
For estates approaching $13.99M per person, credit shelter trusts (A/B or "marital deduction" trusts within a living trust) allow each spouse to preserve their full exemption. Without this structure, a surviving spouse remarries and dies — the original exemption is lost. Preserves $5M+ in tax savings at 40% rate.
$1M+ savingsOnly relevant for estates exceeding federal exemption
Probate itself is not a tax — but it costs $34,000–$38,000 in statutory fees on an $800,000 California estate (attorney fees + executor fees at 4% of gross value). A living trust avoids probate entirely, which is equivalent to a $34,000+ tax-equivalent savings. The trust costs $309.
$34K+ equivalentProbate savings are immediate, not deferred
The federal estate tax is the primary estate tax that still exists — and the one that a living trust can help you plan around. In 2026, the exemption is $13,990,000 per person ($27,980,000 for a married couple using portability). The tax rate on amounts above the exemption is 40%.
The exemption is scheduled to drop significantly after 2025 unless Congress acts. Under the Tax Cuts and Jobs Act, the enhanced exemption ($10M+ inflation-adjusted) reverts to approximately $7M after December 31, 2025 — potentially exposing estates that are currently exempt.
The enhanced federal estate tax exemption from the 2017 Tax Cuts and Jobs Act expires after December 31, 2025 unless Congress extends or makes it permanent. If it reverts to approximately $7 million per person (inflation-adjusted), estates between $7M and $14M that are currently exempt would become subject to 40% federal estate tax.
If you have an estate in the $7M–$14M range, a living trust with a credit shelter structure is not optional — it's mandatory tax planning. HomeTrust can set up the trust document; complex exemption planning may warrant consultation with a tax attorney for this threshold.
For most California homeowners, the federal exemption is not the immediate concern. The math:
If your combined estate is under $25M, federal estate tax exemption planning is not your primary concern. The stepped-up cost basis benefit is. A $900,000 home with a $200,000 original basis saves $70,000 in capital gains taxes through stepped-up basis — more than federal estate tax planning delivers for most homeowners.
For estates exceeding the federal exemption, a credit shelter trust (also called an A/B trust or Bypass Trust) is the key structure within a living trust that preserves the deceased spouse's exemption for the next generation.
When the first spouse dies, assets up to the federal exemption are placed in the Credit Shelter Trust (Trust B), not passed to the surviving spouse outright. This preserves the deceased spouse's exemption amount.
The surviving spouse typically receives income from the Credit Shelter Trust and can access principal for health and support needs. The trust is included in the surviving spouse's estate at death, but the original exemption amount is preserved and not subject to estate tax.
On the surviving spouse's death, assets in the Credit Shelter Trust pass to children without using the surviving spouse's estate tax exemption — effectively doubling the total exemption used across two generations.
California's state estate tax was one of the primary tax reasons to establish a living trust in the state. That changed on January 1, 2026.
The California Estate Tax (which operated independently from the federal estate tax) was formally repealed by AB 2282, signed by Governor Newsom. The tax previously applied to estates exceeding $1 million at graduated rates up to 40% — meaning a $1.5M estate could owe $50,000+ in state estate tax even if federal estate tax did not apply.
This change significantly reduces the urgency of trust-based tax planning for mid-sized estates. If your estate is under $14M (and most California homeowners' estates are), federal estate tax was never the issue — and the California state estate tax that drove much of the trust-planning conversation is now gone.
If you already have a living trust in California, it was likely established partly because of California's state estate tax. The trust remains valuable — it still provides stepped-up basis benefits, avoids probate ($34K+ savings), and maintains privacy. The tax reason changed; the practical benefits did not.
If you are considering establishing a trust primarily for tax reasons, the calculus has shifted. The state estate tax benefit is gone. The federal exemption benefit is only relevant above ~$14M for married couples. The primary financial reason for most homeowners to get a living trust is now: (1) probate avoidance, (2) stepped-up basis savings, (3) community property advantage, and (4) privacy.
Stepped-up basis is the tax benefit that applies to virtually every California homeowner with a home purchased decades ago — not just high-net-worth estates. This is the most universally applicable tax benefit of estate planning.
When you inherit assets — including those held in a living trust — the IRS treats the asset as if it were sold at fair market value on the date of death. Your cost basis is 'stepped up' to that market value, eliminating capital gains tax on the appreciation that occurred during your lifetime.
Example: You purchased your San Diego home in 1994 for $220,000. It's now worth $950,000. Without a trust, if your children inherit the home and sell it for $950,000, their capital gain is $950,000 - $220,000 = $730,000. At California's 13.3% capital gains rate + federal 20% rate, that could mean $95,000+ in taxes. With stepped-up basis, their cost basis is $950,000 — the taxable gain is $0.
Marco walks through the tax math on every trust consultation.
A will achieves stepped-up basis for assets that pass through probate — but with two critical differences from a trust:
California is one of nine community property states in the U.S. — and this status creates a unique tax advantage for married couples that doesn't exist in the 41 common law states. Understanding this advantage explains why California homeowners have an especially strong case for living trust planning.
In a community property state like California, when one spouse dies, 100% of community property assets receive a stepped-up cost basis to fair market value at the date of death. In a common law state (New York, Texas, Florida, etc.), only 50% of property receives a step-up — the deceased spouse's half.
This difference can mean $40,000–$80,000 in additional capital gains tax savings for California couples compared to couples in other states with similar asset values.
Community property includes all assets acquired during marriage, with specific exceptions for separate property (assets owned before marriage, inherited assets, gifts received individually). Community property rules apply regardless of whose name is on the title.
Properly funding a living trust does not change the community property status of assets — it simply ensures the trust agreement captures and documents the community property character of assets so the 100% step-up is correctly applied at death. HomeTrust includes trust funding guidance that addresses this.
The Generation-Skipping Transfer tax is a separate estate tax that applies when assets pass to grandchildren or more remote descendants — bypassing a generation. The GST exemption in 2026 is $13.99 million per person, mirroring the estate tax exemption. The tax rate on skipped generations is 40% (the top estate tax rate) plus an additional 5% surtax on transfers exceeding $1 million.
For the vast majority of California homeowners, GST tax planning is not a concern — the $13.99M per-person exemption per generation is more than adequate to cover most family estates. GST planning becomes relevant when:
A living trust can allocate GST exemption to specific trust sub-accounts, ensuring that assets passing to grandchildren use the GST exemption rather than consuming the parents' estate tax exemption.
The federal gift tax and estate tax share a unified exemption — meaning every dollar you gift during your lifetime reduces the amount you can pass estate-tax-free at death. The annual exclusion for 2026 is $19,000 per recipient ($38,000 per married couple giving jointly). The lifetime exemption is $13.99 million per person.
Transferring assets into a revocable living trust during your lifetime is not a taxable gift — because you retain the right to revoke the trust, the IRS treats the assets as still yours for gift and estate tax purposes. Only when assets are transferred irrevocably (as in an irrevocable trust or a credit shelter trust created within your living trust) does the gift tax exemption get consumed.
This means you can fund your revocable living trust with real estate, bank accounts, and investment accounts without gift tax consequences — the trust remains your asset until your death.
For high-net-worth estates, an Irrevocable Life Insurance Trust removes the life insurance proceeds from your taxable estate — potentially saving millions in estate tax. This is a separate trust from a revocable living trust and is typically set up with the assistance of an estate planning attorney. HomeTrust does not prepare ILITs — this is outside the scope of licensed document preparation.
A common source of confusion: estate planning does not reduce income tax. The revocable living trust is specifically designed for estate transfer — not income tax deferral. Understanding this distinction prevents misaligned expectations.
A revocable living trust does not reduce your income taxes while you're alive. Income earned by trust assets is reported on your personal tax return as if you own the assets directly — because legally, you do. There is no tax advantage to moving assets into a revocable trust before death for income tax purposes.
The income tax benefit of a trust is realized only at death — through the stepped-up basis mechanism. A trust is not a vehicle for ongoing income tax minimization.
Marco walks through the tax math on every trust consultation. $309 flat fee — no hidden costs.
California eliminated its state estate tax as of January 1, 2026. The remaining tax benefits of a living trust are: (1) Federal estate tax exemption — up to $13.99 million per person in 2026, shielding large estates from the 40% federal estate tax. (2) Stepped-up cost basis — assets transferred through a trust receive a stepped-up basis at death, reducing capital gains taxes for beneficiaries when they sell inherited assets. (3) Community property advantage — California community property rules give surviving spouses a 100% step-up in basis for all community property assets, versus 50% in common law states.
California eliminated its state estate tax as of January 1, 2026. The California Estate Tax was previously levied at graduated rates up to 40% on estates exceeding $1 million. This change significantly reduces the tax urgency for living trusts — previously, a major motivation for California trusts was sheltering estates from state estate tax. Now the calculus has shifted: federal estate tax exemption planning and stepped-up basis benefits are the primary tax reasons to establish a living trust.
The federal estate tax exemption in 2026 is $13,990,000 per person ($27.98 million for married couples, using portability). Estates exceeding this threshold are taxed at 40% on the amount above the exemption. For most California homeowners — whose primary asset is a home worth $800K–$1.5M — this exemption is not the driving factor. But for estates approaching or exceeding $10 million, a living trust becomes a critical vehicle for estate tax minimization strategies like credit shelter trusts.
Stepped-up cost basis means that when you inherit assets through a trust, the IRS resets the 'cost' of those assets to their fair market value on the date of your death. If you inherit a home purchased for $200,000 that is now worth $900,000, your new basis is $900,000 — not $200,000. This means if the beneficiary later sells the home, they owe capital gains tax only on appreciation above $900,000, not the original $200,000 purchase price. On a $900,000 home, this step-up can save $80,000 or more in capital gains taxes compared to a direct gift during lifetime.
California is a community property state — assets acquired during marriage are owned equally by both spouses. This creates a unique tax benefit: when the first spouse dies, the surviving spouse receives a 100% step-up in cost basis for all community property assets. In common law states (like most of the rest of the country), the surviving spouse only gets a 50% step-up. For a California couple with $1.5M in community property, this community property step-up can save $40,000–$80,000 in future capital gains taxes for the surviving spouse and heirs.
Living trusts do not avoid capital gains tax during your lifetime — you still owe capital gains if you sell appreciated assets while alive. However, living trusts preserve the stepped-up basis benefit at death, which effectively 'delays' the capital gains reckoning until your heirs sell the inherited assets. For real estate in particular, this can mean the difference between your children owing $100,000+ in capital gains taxes or owing nothing on a sale after inheritance.
Portability allows a surviving spouse to use the deceased spouse's unused federal estate tax exemption. Without a trust, a married couple can simply leave everything to each other and the surviving spouse can claim both exemptions. However, portability has a critical limitation: it only applies to the estate as a whole — if the surviving spouse remarries and the second spouse dies, the original exemption is lost. Credit shelter trusts (created within a living trust) preserve the exemption across generations and protect it from future spouses and creditors.
The GST tax applies to transfers to grandchildren or more remote descendants, preventing families from skipping a generation to avoid estate tax. The GST exemption in 2026 is $13.99 million per person — identical to the estate tax exemption. A living trust can allocate GST exemption to assets passing to grandchildren, sheltering those assets from the GST tax, which is imposed at the highest estate tax rate (40%) plus an additional 5% surtax on large transfers.
Even if your estate is currently under the federal exemption, a living trust may still make financial sense for: (1) Avoiding probate — California probate costs $34,000+ on an $800K home, versus zero cost for trust administration. (2) Stepped-up basis preservation — a living trust ensures your heirs receive the full stepped-up basis on all assets, not just those that pass through a will. (3) Future exemption changes — the federal exemption is scheduled to drop significantly after 2025 unless Congress acts, potentially exposing estates that are currently exempt. (4) Privacy — a trust is not public record; probate is.
A revocable living trust does not provide income tax benefits during your lifetime — you report trust income on your personal tax return as if you owned the assets directly. There is no tax advantage to putting assets in a revocable trust before death. The tax benefit of a living trust is realized at death through the stepped-up basis mechanism, not through income tax deferral while you're alive. This is a common misconception: a revocable trust is an estate planning vehicle, not an income tax planning vehicle.
Marco Mariani (LDA #231) prepares your complete trust package within 1–3 business days. Includes trust document, pour-over will, power of attorney, healthcare directive, and funding guidance.