Passing wealth to the next generation used to be dominated by one question: how do we minimize exposure to the 40% federal estate tax? For most families, that question has largely gone away. The bigger questions now are about control, income tax basis, and — for California families — property tax.
The Federal Estate Tax Backdrop Has Changed
OBBBA, signed into law in July 2025, permanently (barring future legislation) raised the federal estate and gift tax exemption to $15 million per individual ($30 million per married couple with portability) for 2026, indexed for inflation with no scheduled sunset. That’s a major shift from the “use it or lose it” urgency that dominated 2024–2025 planning, when the exemption was set to roughly halve.
The practical effect: most families no longer have a federal estate tax problem. That doesn’t make estate planning less important — it shifts the purpose toward:
• Keeping assets out of probate
• Controlling how and when heirs receive assets
• Protecting a spouse’s access to trust assets
• Preserving income tax basis step-up
• Managing California property tax reassessment under Prop 19
• Addressing state-level estate taxes (NY, MA, OR, WA, etc.)
Trusts: Matching the Structure to the Goal
The ideal trust structure depends on the goal. Revocable living trusts remain the foundation for most California homeowners — not for tax savings, but for probate avoidance, incapacity planning, and flexibility. A revocable trust holds your assets during your lifetime—letting you change or cancel it anytime—and then transfers those assets directly to your beneficiaries when you die, avoiding probate.
Irrevocable trusts come into play once you’re removing assets — and future appreciation — from a taxable estate, or protecting assets from creditors. But funding one means relinquishing control permanently.
See-through trusts as retirement account beneficiaries must meet specific IRS requirements to allow beneficiaries to stretch distributions (subject to the SECURE Act’s 10-year rule for most non-spouse beneficiaries). Drafting details matter enormously — a poorly drafted trust can force a much faster, less tax-efficient payout. We generally recommend naming individuals directly as retirement account beneficiaries instead.
Step-Up in Basis: Often the Most Valuable Benefit Left
For most clients, the single most valuable piece of the current tax code isn’t the high estate exemption, it’s the step-up in basis at death. When someone dies owning an appreciated asset, the heir’s cost basis resets to fair market value on the date of death, erasing decades of unrealized gain. A home bought for $150,000 now worth $1.5 million can pass to an heir who sells shortly after with little to no capital gains tax.
A few implications:
• Community property with right of survivorship in California gets a full step-up on both halves of an asset at the first spouse’s death — not just the deceased spouse’s half, as in non-community-property states. This is a significant, often underused advantage only available in community property states and only for married couples.
• Lifetime gifts of appreciated assets can backfire. A gift carries over the donor’s original (lower) basis — no step-up. Sometimes holding an asset until death is the better move, even if it runs counter to instinct.
Proposition 19: California’s Property Tax Wild Card
For California families, Prop 19 (effective February 2021) has arguably had a bigger day-to-day impact than anything at the federal level. It dramatically narrowed the parent-child (and grandparent-grandchild) exclusion from property tax reassessment.
Before Prop 19, a parent could transfer a primary residence and up to $1 million of assessed value in other property to a child without reassessment. Under Prop 19, the exclusion applies only to a primary residence, and only if the child also uses it as their primary residence within one year. Rental homes, vacation properties, and commercial real estate no longer qualify at all. Even for a qualifying residence, if market value exceeds the parent’s taxable value by more than $1 million, the excess triggers a partial reassessment.
This has pushed planning conversations toward deciding, while a parent is alive, whether a child genuinely intends to move into the family home and recognizing that heirs may net far less rental income than parents currently do after reassessment, often making a sale more likely than keeping a property in the family.
Beyond Trusts: 529 Superfunding and Roth Conversions
529 superfunding: The annual gift tax exclusion is $19,000 per recipient for 2026 ($38,000 per married couple). A special election lets donors front-load five years of exclusions into a single contribution — up to $95,000 individually or $190,000 per couple, per beneficiary. This works well for grandparents with multiple grandchildren, though funds must go toward education, and dying before the five-year period ends pulls unused years back into the taxable estate.
Roth conversions: With the SECURE Act’s 10-year distribution window for most inherited IRAs, converting during a parent’s lower-bracket retirement years can beat a child paying ordinary income tax on distributions during peak earning years. This tilts toward conversion when parents are in a lower bracket than their children, don’t need the funds themselves, or have a temporary low-income window (a gap year, business loss, or heavy deductions).
For those who are charitably inclined, naming a qualified charity as a beneficiary also removes the allocated assets from the estate for estate tax purposes. For tax purposes, it may make sense to donate your pre-tax IRA monies to charity and allocate your taxable monies (brokerage accounts) to individuals. The Individuals will then get the step-up in basis, avoiding any capital gain taxes, and there are no estate taxes associated with charitable gifts.
Every family’s mix of trust structure, basis planning, and Prop 19 exposure is different — we’re happy to walk through the numbers for your specific situation.
This article is for general informational purposes and does not constitute individualized tax, legal, or financial advice. Please consult with your advisor regarding your specific situation.
