California is among the states that impose no tax on inherited wealth. There is no state estate tax here and no state inheritance tax, so the headline most people have heard is accurate as far as it goes.
Where it stops helping is the assumption that follows. Plenty of Redwood City families inherit from a parent or a sibling and still end up writing a check. It just does not go to Sacramento. The bills come from other directions, and each is easier to handle when you see it coming.
Estate Tax vs Inheritance Tax: Two Different Bills
These get used interchangeably, and they work nothing alike.
An estate tax is charged to the estate itself, before anything is handed out. The executor pays it from estate funds, and heirs get what is left. The federal government charges one. For deaths in 2026 it applies only above $15 million per person, so very few estates reach that line.
An inheritance tax is charged to the person who receives the money, after it arrives. The rate usually depends on how closely related you were. There is no federal version, and California does not have one.
A Relative in Another State Can Still Create a Tax Bill
Living in California does not protect you here. This tax follows the state where the person who died lived. It does not follow the heir.
Five states still charge one: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Someone in Redwood City who inherits from an aunt in Pennsylvania can owe Pennsylvania tax on it. Spouses are exempt in all five, and children are exempt in several, but distant relatives and friends often are not.
About a dozen states also charge their own estate tax, some with limits far below the federal one. A cabin in Oregon or a condo in Washington can pull an estate into a state return even when the total is modest.
Inherited Retirement Accounts Come With Income Tax
This is the bill Redwood City families actually run into. Money in a traditional IRA or 401(k) was never taxed going in, so it gets taxed coming out, and inheriting the account does not change that.
Most heirs who are not a surviving spouse have to empty the account within about ten years. Each withdrawal counts as regular income in the year you take it, added to your salary, and California taxes that income as well. Draining the whole balance at once can push you into a higher bracket. Roth accounts usually work differently, since the tax was already paid. Our piece on coordinating California estate plans with retirement and beneficiary assets covers how these fit the wider plan.
Selling Inherited Property Later Can Trigger Capital Gains
Inherited assets usually get a reset. The value is set at the date of death, so decades of growth before that point are generally wiped away for tax purposes. For a Bay Area home bought long ago, that reset is worth a lot.
What is not wiped away is what comes next. If the house keeps rising and sells two years later for more than the date-of-death figure, that gain can be taxed.
The Property Tax Bill May Not Stay the Same
Inheriting a California home does not mean inheriting the low property tax that came with it. Under current rules, a child keeps the lower assessed value only by moving in and making the house their own main home, generally within a year of the transfer. Even then a value cap applies, so a higher-priced home can be partly reassessed anyway. Without that move, the county can reassess at market value and the yearly bill can jump. We walk through this in how Proposition 19 affects your estate plan.
Key Takeaways
- California charges no state estate tax and no inheritance tax.
- Estate tax comes out of the estate; inheritance tax is charged to the person receiving the money.
- Five states still levy an inheritance tax, and it follows where the deceased lived, not where you live.
- Inherited traditional retirement accounts generate ordinary income tax as they are withdrawn.
- The date-of-death value reset helps, but later gains can still be taxed on a sale.
- Keeping a parent's low property tax generally requires moving into the home, and a value cap still applies.
Knowing Which Taxes Apply Before the Money Arrives
None of this is a reason to dread an inheritance. It is a reason to learn early which parts apply, since several can be planned around while the timing is flexible. The Law Offices of C.R. Abrams, P.C. has worked with California families on these questions since 1994, and the answer turns on where the assets sit and how they are titled. Going over the details with an attorney and a tax advisor is usually time well spent. You can read about our approach to estate planning in Redwood City any time.
Our seminars cover how California treats inherited assets and where the real tax exposure tends to sit, with time for questions. Register for a seminar to learn more.
Or, to go over your own situation first, request a free consultation with The Law Offices of C.R. Abrams, P.C.