USA – CALIFORNIA Law and Practice Contributed by: Jennifer J. McCall, Matthew Perotti and Ashley E. Huh, Pillsbury Winthrop Shaw Pittman LLP
favourable tax treatment than those made to private foundations. A lifetime gift typically does not trigger federal income tax for the donor. However, it may shift the built‑in gain to the donee because the donee receives the donor’s carryover basis. By contrast, assets transferred at death generally receive a step‑up in basis, allowing heirs to sell such assets with little or no capital gains tax due. 5.2 Testamentary Dispositions The United States imposes a federal gift tax, estate tax, and Generation-Skipping Transfer (GST) tax. The gift and estate tax regimes are unified, meaning gifts made during an individual’s lifetime reduce the amount of exemption available to offset estate tax at death. Each US citizen and US domiciliary has a life- time gift and estate tax exemption. Transfers up to that exemption amount are not subject to tax, but amounts exceeding the exemption are taxed at a federal rate of 40%. Gift and Estate Tax Exemption In 2026, the gift and estate tax exemption is USD15 million per US citizen or domiciliary. Married couples who are both US citizens can effectively combine their exemptions – either through gift splitting during life or through portability, which allows a surviving spouse to use a deceased spouse’s unused exemption. US domicile for transfer tax purposes is determined by whether an individual lives in the US with no inten - tion of leaving. This domicile test is different from the residency test used for income tax. Estate Tax Estate tax applies at death when an individual trans- fers assets to recipients other than qualified charities or a US citizen spouse, to the extent those transfers exceed the individual’s remaining exemption. Any unused exemption is applied to the taxable estate first. If taxable transfers exceed the remaining exemp- tion, the excess is subject to a 40% estate tax. Transfers to qualified charities and US citizen spouses are fully deductible through the charitable or marital
deduction, provided the transfers are made outright. Special rules apply to transfers made in trust. Non‑Residents Non‑resident individuals may also be subject to US federal estate tax on US-situs assets, such as real property. Unlike US citizens and domiciliaries, non‑residents have only a USD60,000 estate tax exemption. Certain US states also impose their own estate tax and/or inheritance tax. Rules and exemption amounts vary by state. Generation‑Skipping Transfer Tax GST tax applies to transfers made to “skip persons”, generally meaning a grandchild or more remote descendant, or someone more than 37½ years young- er than the transferor. Each individual has a separate GST exemption – USD15 million in 2026 – which is not unified with the gift and estate tax exemption. If a transfer to a skip person exceeds the annual GST exclusion of USD19,000 in 2026, the excess reduces the transferor’s GST exemption. Once the exemption is exhausted, transfers are subject to a 40% GST tax. Additional complex rules apply to transfers made through trusts. Income Tax Basis Adjustment Upon a decedent’s death, inherited assets generally receive a step‑up in income tax basis to fair market value as of the date of death. Succession Laws State law governs the succession of a decedent’s tan- gible and intangible property. The primary factor in determining which state’s laws apply is the decedent’s domicile – the place they consider their permanent home and intend to remain indefinitely. An individual can have only one domicile. If the decedent is domiciled in a state, that state’s law governs the succession of their personal property (tangible and intangible) and any real property located within the state.
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