Protection Against Estate Tax Increases

Emily just called, frantic. Her father passed away last month, and she discovered a codicil to his trust…dated after the trust was originally signed. It attempted to disinherit her sister, claiming a recent falling out. The problem? It wasn’t properly witnessed, and it’s almost certainly invalid. Now, Emily’s facing a potential family war and significant legal fees to untangle the mess. A properly executed trust, and consistent funding, avoids these nightmares.

The anxiety around estate tax is shifting, and I’m seeing a lot of confusion from clients. For over 35 years, I’ve guided families through these complexities, not just as an Estate Planning Attorney, but as a CPA as well. This dual perspective is critical. Many attorneys don’t fully grasp the implications of cost basis, capital gains, and valuation – aspects where a CPA’s insight is invaluable. We don’t just talk about if your estate will be taxed, but how much and, importantly, how to legally minimize it.

What is driving the renewed concern about estate taxes?

The temporary, inflated estate tax exemption enacted during the Trump administration is set to revert back to roughly half that amount on January 1, 2026. Currently, you can transfer over $13 million tax-free. After the sunset provision kicks in, that drops dramatically. This has prompted many to revisit their estate plans, fearing a substantial tax burden on their heirs. However, it’s crucial to understand that for the vast majority of Americans, federal estate tax isn’t the primary concern. Avoiding probate, maintaining privacy, and ensuring assets pass seamlessly to your loved ones are often more pressing goals.

Will my living trust still be effective after 2025?

Absolutely. A well-drafted living trust primarily functions to avoid probate court – a public, often lengthy, and potentially expensive process. While the estate tax exemption is shrinking, the fundamental benefits of a trust remain unchanged. The trust itself doesn’t change; it’s the underlying tax law that shifts. We build flexibility into the document allowing for adaptation as tax laws evolve. Furthermore, even if your estate exceeds the reduced exemption amount, there are legal strategies we can employ to minimize the tax impact.

What strategies can I use to protect my estate from potential taxes?

There’s no one-size-fits-all answer. The best approach depends on your specific circumstances and the size of your estate. Several options are available, including gifting strategies, utilizing life insurance trusts (ILITs), and establishing qualified personal residence trusts (QPRTs). These techniques are complex and require careful planning, which is where my CPA background truly shines. I can analyze the tax implications of each strategy to determine the most advantageous path for you. Importantly, remember that under California Probate Code § 15200, a trust is not valid unless it holds identifiable property; signing the trust document is only step one—you must legally transfer assets (funding) to the trustee for the trust to exist.

What about real estate and Proposition 19?

Proposition 19 adds another layer of complexity. While transferring your home into your revocable trust does not trigger reassessment, the eventual distribution to your children will trigger a Prop 19 reassessment to current market value unless the child moves in as their primary residence within one year. This can result in significantly higher property taxes for your heirs. Careful planning is essential to mitigate this impact.

What happens if I forget to transfer an asset into my trust?

This is a surprisingly common issue. Clients often create a trust but fail to fully fund it, leaving assets outside of its protection. For deaths on or after April 1, 2025, if a primary residence intended for the trust was accidentally left out (valued up to $750,000), it qualifies for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). It’s critical to understand the distinction: this is a Petition (a Judge’s Order), not a Small Estate Affidavit. Affidavits have very strict limitations. A Petition allows a streamlined transfer of the property through the court, avoiding a full probate.

How will the new federal regulations affect LLCs held in my trust?

The rules surrounding LLCs are constantly evolving. As of March 2025, domestic U.S. LLCs held in a living trust are exempt from mandatory BOI reporting; however, trustees managing foreign-registered entities must still file updates with FinCEN within 30 days. We’re proactively addressing these requirements for our clients to ensure compliance.

What about my digital assets – photos, emails, cryptocurrency?

Digital assets are a growing concern. Without specific RUFADAA language (Probate Code § 870) in your trust, service providers like Apple, Google, and Coinbase can legally deny your successor trustee access to your digital photos, emails, and cryptocurrency. We incorporate these provisions into our trusts to ensure a seamless transfer of your digital life.

With the OBBBA, is estate tax planning still relevant?

Effective Jan 1, 2026, the OBBBA permanently set the Federal Estate Tax Exemption to $15 million per person, meaning the primary focus of most Living Trusts is now avoiding probate and protecting privacy, rather than minimizing federal taxes. While the OBBBA provides some stability, it’s still essential to review your plan and consider potential state estate taxes, which can vary significantly.

What if I want to change my trust after it’s been created?

Unless the trust instrument expressly states otherwise, Probate Code § 15400 presumes that all California trusts are revocable by the settlor, allowing you to amend, revoke, or restate the trust at any time while you have capacity. Life circumstances change, and your estate plan should adapt accordingly. Regular reviews are crucial.

What determines whether a California trust settlement remains private or erupts into public litigation?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

To close a trust administration smoothly, the trustee must complete the steps of trust administration, ensure no pending beneficiary claims exist, and distribute assets according to the trust terms.

A stable trust administration relies on the trustee’s ability to balance investment duties, beneficiary communication, and tax compliance. When these elements are managed proactively, families can avoid the emotional and financial drain of litigation.

Verified Authority on California Trust Law

• Trust Validity (Probate Code § 15200): California Probate Code § 15200
  The foundational statute confirming that a trust requires property to be valid. This is the legal basis for the “funding” requirement—without transferring assets (deeds, accounts) into the trust, the document is legally empty.
• Revocability Presumption (Probate Code § 15400): California Probate Code § 15400
  Confirms that California trusts are presumed revocable unless stated otherwise. This grants the settlor the flexibility to change beneficiaries, trustees, or terms as life circumstances evolve.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute acts as a backup for funding errors. If a primary residence (up to $750,000) is left out of the trust, this Petition to Determine Succession avoids a full probate administration.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Essential for all trust creators. While the trust avoids probate, it does not automatically avoid property tax increases for heirs. Specific planning is required to navigate the “primary residence” requirement for children.
• Federal Estate Tax Exemption: IRS Estate Tax Guidelines
  Reflects the permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This shifts the planning focus for most Californians from tax avoidance to asset protection and probate avoidance.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without this statutory authority included in your trust, your digital legacy (crypto, social media, cloud storage) may be permanently locked away from your family by service providers.