Federal and California Transfer Taxes
Federal Estate, Gift, and GST Tax
Federal transfer tax uses a unified credit against a single lifetime exemption that applies to gifts and estates, with a separate GST exemption. Key concepts: gross estate inclusion (including life insurance, retained interests, and powers of appointment under IRC sections 2033-2042), the marital deduction, the charitable deduction, and portability of the deceased spousal unused exclusion (DSUE). Annual exclusion gifts and direct tuition/medical payments are excluded. Traps: forgetting that life insurance proceeds are included if the decedent held incidents of ownership; confusing the unlimited marital deduction with the lack of a similar California state marital deduction; and missing GST allocation issues.
California Transfer Tax
California has no estate or inheritance tax. It does, however, impose a property tax reassessment on change of ownership, with important parent-child and grandparent-grandchild exclusions and a principal residence exclusion. Candidates should know that California's system is a property tax regime, not a transfer tax regime.
Worked Example
A decedent leaves $5 million to a spouse and $3 million to a charity, with a $2 million life insurance policy payable to a revocable trust. The insurance is included in the gross estate because the decedent retained incidents of ownership; the marital and charitable deductions remove the $8 million of qualifying transfers, leaving only the insurance-driven analysis.
Rule of Thumb
Include first, deduct second. Ask whether an asset is in the gross estate before applying any deduction or credit.