• Bryan D. Eisenbise, Esq.

The California Estate Tax: Everything You Need to Know

March 26, 2019, State Senator Scott Wiener (D) of San Francisco announced the introduction of Senate Bill 378, which would create a California estate tax. Currently 12 states and the District of Columbia have a state estate tax in addition to also being subject to the federal estate tax. Although SB 378 is still only a bill, the enactment of an estate tax in California would be unprecedented. Here are a few points you need to know:

It would need to be voted on by the public. The path to enactment is still a long one for the tax. The bill first needs to be passed by the state legislature. Once passed it will then appear on the November 2020 ballot for public vote

The state estate tax brackets and rates are identical to federal brackets and rates. Most state estate tax systems have their own brackets and rates and work independently from the federal system. This is not the case with California.

The tax imposes a $3.5 million exemption. With the passing of the TCJA the federal exemption doubled from $5.5 million to $11 million. Adjusted for inflation the federal exemption currently stands at $11.4 million. This means that estates above $3.5 million would be subject to the state estate tax and estates above $11.4 million would be subject to both the state and federal estate taxes. However . . .

. . . the tax allows a credit for federal estate taxes paid. Once an estate hits the $11.4 million mark, the California tax allows for a dollar-for-dollar credit, which in effect, cancels the state tax once the federal tax comes into play. The end result of this structure is for the California taxpayer to feel subject to a single estate tax with an exemption of $3.5 million (California $3.5 million to $11.4 million, and Federal $11.4 million +). It is important to understand the structure of this tax because any change with the federal tax will directly affect the state tax For example, Bernie Sanders' proposed "For the 99.8% Act" seeks to lower the federal exemption to $3.5 million, which would eliminate any estate tax paid to California.

Revenue generated from the tax has a very specific purpose. All revenue will be directed to a newly created special fund: the "Children’s Wealth and Opportunity Building Fund." This new fund directs proceeds toward programs and services directly addressing and alleviating socio-economic inequality by building assets among people who have historically lacked them, including helping low income children build wealth through savings accounts. Proponents of the bill claim the wealth level of a child's parents is the most significant predictor of future financial success.

The bill is currently in committee without any vote currently scheduled. Again, the bill needs to pass in the state legislature before it appears on the November 2020 ballot. Currently the bill is being discussed in committee and is likely to be changed as it approaches a vote. A vote has been authorized to occur anytime after March 23rd.