Estate Planning When You'll Never Owe Estate Tax: What California Families Actually Need in 2026

The $15 Million Headline (and the False Sense of "I'm Done")

If you have been following the news, you have seen the headline: the federal estate tax exemption is now $15 million per person, or $30 million for a married couple. For the vast majority of California families, that number feels so far above their net worth that estate planning seems like someone else's problem.

That assumption is understandable, and it is wrong.

For more than 99% of American households, estate planning was never about the estate tax. It was always about the things that actually move money when someone dies: income tax on inherited assets, property tax reassessments on the family home, distribution rules on retirement accounts, and the cost and delay of probate. The new exemption does not make those issues disappear. In some cases, it makes them more important, because families who skip planning entirely are the ones most likely to pay avoidable taxes and fees.

If you are a married California homeowner with $1 million to $8 million in total assets, this article walks through the estate planning issues that actually apply to you in 2026. None of them involve the federal estate tax.

What the New Exemption Actually Is

The One Big Beautiful Bill Act (P.L. 119-21), signed into law on July 4, 2025, set the federal estate, gift, and generation-skipping transfer tax exemption at $15 million per individual beginning January 1, 2026, with annual inflation adjustments in subsequent years. For a married couple, the combined exemption can reach $30 million through portability, assuming the surviving spouse elects it on a timely filed estate tax return.

The 40% estate tax rate still applies to amounts above the exemption, and lifetime taxable gifts reduce the exemption available at death. But for a family with $3 million or $5 million or even $8 million in total assets, the exemption is not the relevant number. The Internal Revenue Service (IRS) has confirmed the $15 million basic exclusion amount for calendar year 2026.

What is relevant, for almost every California family, is everything else.

Step-Up in Basis: California's Community Property Advantage

When you inherit an asset, its tax basis generally adjusts to fair market value as of the date of death, under Internal Revenue Code Section 1014. If your parent bought a stock for $10,000 and it was worth $100,000 when they died, your basis becomes $100,000. Sell it the next day and there is no capital gains tax on the appreciation that happened during your parent's lifetime.

Here is where California couples have an advantage most people do not know about.

Because California is a community property state, IRC Section 1014(b)(6) provides that when the first spouse dies, both halves of qualifying community property receive a stepped-up basis, not just the deceased spouse's half. The surviving spouse's half steps up too.

That means if a married couple bought a home in the Bay Area for $400,000 in 1995 as community property, and it is worth $1.8 million when the first spouse passes away, the entire $1.8 million becomes the new basis. If the surviving spouse sells the home shortly after, the capital gains exposure on the pre-death appreciation may be eliminated or substantially reduced. With a separate property asset, by contrast, only the deceased spouse's half would receive the step-up.

This is one reason the way you title assets matters. Assets held as community property, or community property with right of survivorship, may qualify for the full double step-up. Assets held as joint tenancy, or in a trust that does not clearly characterize the property as community property, may not. For California couples with appreciated real estate and investment portfolios, reviewing how assets are titled can be one of the most consequential estate planning decisions they make.

For a deeper look at how capital gains taxes work in California, including the combined federal and state burden that most people underestimate, see our article on capital gains tax planning.

Proposition 19: What Happens to the Family Home's Property Tax Bill

For decades, California's Proposition 58 allowed parents to transfer a home, and up to $1 million of other real property, to their children without triggering a property tax reassessment. Children simply inherited the parent's low assessed value, which in a state where many homes have appreciated five- or tenfold over 30 years could mean the difference between a $4,000 annual property tax bill and a $20,000 one.

Proposition 19, which took effect February 16, 2021, replaced those rules. Under the current law, a child who inherits a parent's principal residence can avoid a full reassessment only if the child moves in and files for the Homeowners' Exemption within one year of the transfer. The exclusion is also capped: the child can keep the parent's assessed value plus an additional amount, which for transfers between February 16, 2025 and February 15, 2027 is $1,044,586. Any value above that threshold is reassessed to current market value. For example, a home with a taxable value of $300,000 and a market value of $1.6 million would exceed the protected amount, and the excess would be reassessed even if a child moves in.

If the child does not move in, the exclusion does not apply at all. The property is reassessed at full current market value, and the property tax bill can jump dramatically. Rental properties, vacation homes, and other non-principal-residence real estate no longer qualify for the parent-child exclusion under Proposition 19.

For California families with an appreciated primary residence, this creates a planning conversation that has nothing to do with the estate tax. If the plan is for children to inherit the family home, the family needs to understand whether any child intends to live in it, what the property tax impact will be if they do not, and whether the home should be sold during the parents' lifetime, transferred at death, or handled differently. The old assumptions, that children automatically keep the low property tax base, no longer hold.

Inherited IRAs and the 10-Year Rule: The Hidden Tax Bill

The SECURE Act, which became effective January 1, 2020, eliminated the "stretch" individual retirement account (IRA) for most non-spouse beneficiaries. Under the prior rules, a child who inherited an IRA could take distributions over their own life expectancy, potentially stretching the tax deferral over decades. Now, most non-spouse beneficiaries who are not "eligible designated beneficiaries" must fully distribute the inherited IRA by December 31 of the 10th calendar year following the year of the owner's death.

If the original account owner died on or after their required beginning date, the date they were required to start taking required minimum distributions (RMDs), the beneficiary may also need to take annual RMDs during years 1 through 9, in addition to emptying the account by year 10.

Here is why this matters for a family with a $2 million IRA and a $4 million house. The IRA is the part of the estate that generates income tax. Every dollar withdrawn from an inherited traditional IRA is taxed as ordinary income to the beneficiary. If a beneficiary in their peak earning years is forced to distribute a large IRA over a 10-year window, the withdrawals can push them into higher tax brackets, trigger additional Medicare premium surcharges, or create other tax consequences that the old stretch rules would have avoided.

For many California estates, the largest tax bill at death is not the estate tax. It is the income tax on deferred retirement accounts, accelerated by the 10-year rule. Beneficiary designations, the order of withdrawals across accounts, and whether Roth conversions during life make sense are all planning questions that can significantly affect how much of the retirement account actually reaches the next generation.

For more on coordinating withdrawals, Social Security, and portfolio distributions in retirement, see our article on retirement income planning.

Probate in California: Expensive, Public, and Avoidable

Probate is the court-supervised process of distributing assets that pass through a will or by default when someone dies without an estate plan. In California, probate has two features that make it particularly worth avoiding for most families: the cost and the public record.

California's statutory probate fees are calculated on the gross value of the probate estate, not the net value after mortgages or debts. Both the probate attorney and the executor, also called the personal representative, are entitled to compensation on the same graduated scale: 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000, 1% of the next $9 million, and 0.5% of the next $15 million.

For a $1 million estate, the combined attorney and executor fees can reach approximately $46,000. For a $2 million estate, approximately $66,000. These are ordinary statutory fees, before extraordinary costs like litigation, appraisals, or property sales.

A home worth $1.5 million with a $900,000 mortgage contributes $1.5 million to the fee calculation, not $600,000. That is how gross-value probate fees work, and it is one of the reasons probate in California can be so expensive relative to the actual equity in the estate.

Probate is also a public process. The court file, including the will, the inventory of assets, and the distribution plan, is available to anyone who requests it. For families who value privacy, that is a meaningful downside.

A properly funded revocable living trust avoids probate for the assets held in the trust. The trust is a private document, the distribution of assets is handled by the successor trustee without court supervision, and the statutory probate fees do not apply. The key phrase is "properly funded." A trust that was signed but never had assets transferred into it provides no probate protection. The trust only governs the assets it owns, which means the funding process (retitling real estate, updating account registrations, and assigning beneficiary designations to the trust) is as important as the trust document itself.

This is the question many California families ask: do I need a living trust in California? For most families with a home and retirement accounts, the answer is yes. Not because of the estate tax, but because a funded trust is the most practical tool for avoiding probate, maintaining privacy, and managing incapacity if it becomes an issue during life.

Review Your Plan If...

If your estate plan was written before 2020, several things have changed that may affect it:

• Proposition 19 took effect in February 2021. Plans that assumed children would inherit the family home's low property tax base may need to be revisited.
• The SECURE Act eliminated the stretch IRA for most beneficiaries. Plans that relied on slow distributions from inherited IRAs need to account for the 10-year rule.
• The estate tax exemption has changed substantially. Plans that included complex trust structures designed to minimize estate tax may be paying for complexity that no longer serves a purpose, or may need to be simplified.
• Beneficiary designations may be stale. Retirement accounts, life insurance, and annuities pass by beneficiary designation, not by will or trust. If these have not been reviewed in years, they may not reflect your current wishes.
• Your assets or family situation may have changed. A home sale, a relocation, a new grandchild, a marriage, or a divorce can all make an existing plan obsolete.

If any of these apply, it may be time to pull out the binder and see whether the plan still does what it was designed to do.

How Up Capital Management Approaches Estate Planning

Estate planning is not a separate exercise from retirement planning, tax planning, or investment management. It is one piece of an integrated financial picture, and the pieces only work when they are coordinated.

Up Capital Management quarterbacks the estate planning process as part of the wealth management relationship. That means coordinating the strategy, the document process, and the tax picture under one roof rather than sending clients out to figure it out on their own. We look at how your assets are titled, what your beneficiary designations say, how Proposition 19 affects your family home, how the 10-year rule affects your retirement accounts, and how all of it connects to your retirement income plan and your tax situation.

We do not earn commissions. Because we are a fee-only fiduciary, our recommendations come with no incentive to sell you something you do not need. The goal is an estate plan that fits your life, your family, and your tax picture, built on advice that puts your interests first.

If you are a California family wondering whether your estate plan still makes sense in 2026, we would welcome a conversation. You can schedule a consultation to talk with a fee-only fiduciary advisor about how your estate plan fits your broader retirement and tax picture.

This article is for educational purposes only and does not constitute legal, tax, or investment advice.

Advisory services offered through Up Capital Management, Inc., an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. This material is for informational and educational purposes only, reflects the opinions of the author as of the publication date, and is subject to change without notice. It does not constitute individualized legal, tax, or investment advice, and no portion should be relied upon as a recommendation for any specific person. Federal estate and gift tax, California property tax, and retirement account distribution rules cited reflect law in effect as of the publication date and are subject to legislative and regulatory change. Examples are hypothetical and do not describe any actual client. Up Capital Management does not provide legal services and does not prepare estate planning, trust, or probate documents. Consult a qualified tax professional regarding your specific circumstances before implementing any strategy discussed here.

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