Update on Pending California State Tax Legislation

A new bill was recently introduced in the California state legislature. If the bill becomes law, it could have a significant financial impact on some California residents. The details, as we understand them today, are below. If this change becomes law, clients would have a window of time to reposition their estate plans.

Introduced by State Senator Scott Wiener (D-San Francisco), Senate Bill 378 would impose state-level gift, estate and generation-skipping transfer taxes on gifts made both during life and at death, after December 31, 2020.

Specifically:

California transfer taxes would be imposed at the same rate as the federal regime (currently 40%).However, unlike the federal regime, where the basic exclusion amount (i.e., the amount that can pass without the imposition of transfer taxes) is currently $11.4 million per individual and is adjusted for inflation, the basic exclusion amount for such transfers for California residents would be reduced to $3.5 million per individual starting in 2021 and would not be adjusted for inflation.Because there would be a credit for all transfer taxes paid to the federal government, there would be no double taxation. This means that any transfer made by a California resident during life or after death (e.g., via will or trust) that exceeded $3.5 million would be taxed at the rate of 40%. However, once the total transferred reached the federal exclusion amount, the federal gift and estate tax would apply instead. Essentially, California is proposing to collect a 40% tax on the difference between $3.5 million and the federal exclusion amount ($11.4 million in 2019).All transfer taxes, interest and penalties generated by the bill would finance the proposed Children’s Wealth and Opportunity Building Fund, a separate fund in the State Treasury that would pay for programs to help address socioeconomic inequality.

The bill is in its initial proposal phase, and there will likely be multiple changes and modifications as it works its way through the legislative process. California law requires that voters approve any law imposing new taxes. If passed by legislators, the bill would be put up for a public vote in the November 2020 election.

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