Estate & Tax Planning in California: The Basics

Estate and tax planning are crucial items to complete as part of a family's financial plan. It is a topic that crosses everyone's mind but gets pushed to the bottom of the to-do list. It can be complex, confusing, and time-consuming, but the benefits that it can provide to your family and the generations to come are invaluable.

Most of the families we serve are California residents. Therefore, it is imperative to understand the complexities of state and federal tax laws. Our goal is to educate families on their available strategies and help implement a plan aligned with their unique goals and objectives.

Available Estate and Tax Planning Strategies:

1. Revocable and Irrevocable Trusts: Trusts are a fundamental component of estate planning, offering a way to manage and protect assets.
   
   • Revocable Trusts provide flexibility, allowing the grantor to alter or revoke the trust during their lifetime.
   • Irrevocable Trusts offer tax benefits and asset protection by relinquishing the grantor's control over the trust assets. Selecting the right trust depends on your financial goals and estate planning objectives.
2. Charitable Remainder Trusts (CRTs): CRTs allow individuals to achieve their philanthropic goals while receiving income and tax benefits. When you donate assets to a CRT, you receive a set income for a period of time. Upon your passing, the remaining assets pass to a charity of your choice. CRTs are also a strategic way to minimize taxes. In the year of contribution, you claim an immediate charitable deduction. To make a CRT even more efficient, we like to see families contribute appreciated assets to the trust. This helps avoid capital gains taxes within the trust, which is particularly effective in California, where state income taxes can heavily affect investment returns.
3. Grantor Retained Annuity Trusts (GRATs): GRATs allow the transfer of asset appreciation to heirs with minimal gift tax liability. The grantor contributes assets to a trust and receives annuity payments for a term. Any asset appreciation beyond the IRS-assumed interest rate passes to the beneficiaries tax-free. GRATs are particularly effective in low-interest-rate environments.
   

   For example, consider a tech entrepreneur in California with a growing business valued at over $10 million. By establishing a GRAT, they transfer a portion of their business into the trust, retaining annuity payments for a term of years. The business continues to grow, and at the end of the term, the appreciation exceeds the IRS's assumed interest rate, passing to the heirs tax-free. Concurrently, a CRT is set up with other assets, providing the entrepreneur with income and a significant tax deduction while also benefiting a charity they are passionate about.¹

4. Life Insurance: Incorporating life insurance into your estate plan can address liquidity needs and ensure that your heirs are not forced to sell assets to cover estate taxes. Life insurance proceeds are generally free from income and estate taxes when properly structured, such as through ownership by an irrevocable life insurance trust (ILIT). This strategy is indispensable in states like California, where high property values can lead to substantial estate tax liabilities.
5. Tax Loss Harvesting: An often overlooked strategy, tax loss harvesting involves selling underperforming investments to realize losses, which can offset taxable gains. Regularly reviewing and adjusting your portfolio can keep you aligned with your investment goals by helping reduce your tax burden and enhancing your estate's value.

In conclusion, advanced tax minimization strategies are essential for California families and businesses aiming to preserve their estates for future generations. By understanding and utilizing tools such as trusts, life insurance, and tax loss harvesting, you can minimize taxes while maximizing the impact of your legacy.

In part two of this series, we'll dive deeper into tax loss harvesting, how it works, and how it can benefit you.

Consultation with a specialized wealth advisor is recommended to tailor these strategies to your circumstances and to stay informed about California's latest tax law developments.

¹This hypothetical scenario is for illustrative purposes only. Actual performance and results will vary. This example does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. This example does not represent actual clients. Any resemblance to actual people or situations is purely coincidental.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Investment advisory services are offered through Carmel Capital Partners, an SEC Registered Investment Advisor.