That doesn't mean taxes are irrelevant to your estate plan. Income tax, property tax reassessment, capital gains, and federal estate tax rules all still apply. This article breaks down each one, and explains why proper trust funding — not just signing documents — is what actually protects your family.
HomeTrust helps San Diego homeowners set up and fund California-specific living trusts, so probate complications and funding gaps don't undo the plan later.
Key Takeaways
- California has no state inheritance or estate tax — only very large estates owe federal estate tax
- A revocable living trust doesn't change how you file income taxes while you're alive
- Putting your home in a living trust does not trigger Prop 13 reassessment
- Trust assets get a step-up in basis at death, cutting capital gains tax for heirs
- Only a funded trust avoids probate; creating the documents alone is not enough
Does California Tax Living Trusts? Understanding the Basics
California abolished its inheritance tax back in 1982 through Revenue and Taxation Code section 13301, following voter-approved Proposition 6. The state has collected zero inheritance tax on deaths occurring after June 8, 1982. There's no separate state estate tax either.
Here's the distinction that trips people up:
- Inheritance tax — paid by the person receiving the assets
- Estate tax — paid by the estate itself, before distribution
Neither exists at the California state level. Only the federal estate tax applies, and only above the federal exemption threshold.
A revocable living trust is what the IRS calls a "grantor trust." That means the IRS and California both disregard it as a separate taxpayer while you're alive. All income the trust generates still gets reported on your personal Form 1040, exactly as it would if you hadn't created the trust at all.
Do You Pay Taxes on Money Inherited from a Living Trust in California?
Generally, no — not on the principal. Beneficiaries don't owe California income tax simply for receiving trust assets. However, if the trust generates income (such as rental payments or dividends) and distributes that income to a beneficiary, that portion is taxable as personal income.
How Much Can You Inherit Without Paying Taxes in California?
There's no state-level threshold, because there's no state inheritance tax to trigger. The number that actually matters is the federal estate tax exemption. For 2025, that's $13,990,000 per individual, rising to $15,000,000 in 2026. Estates below that figure owe zero federal estate tax.
Property Taxes and Living Trusts (Prop 13 & Prop 19)
This is where a lot of confusion happens, so let's separate two scenarios.
Moving your own home into your own revocable trust does not trigger reassessment. The Board of Equalization's Assessors' Handbook confirms this directly: transferring a principal residence into your own revocable living trust is excluded from a change in ownership under Prop 13. Your assessed value stays put.
What happens when property passes to heirs is different. Proposition 19 changed the rules for parent-to-child transfers starting February 16, 2021:
- The exclusion now applies mainly to a family home the child will actually live in as a primary residence
- The child must move in within one year and file for the homeowners' exemption within that window
- There's a value cap: the exclusion covers the home's factored base-year value plus $1,044,586 (the figure applicable for transfers between February 2025 and February 2027)
- Rental properties and vacation homes generally get reassessed to market value when transferred to heirs, with no exclusion available
Why deed preparation matters: An improperly retitled home can lose its Prop 13 protections entirely, which can mean a jump in property taxes overnight. Correct trust funding is what preserves that benefit—not optional paperwork after the trust is signed.
HomeTrust's package, starting at $409 / settlor plus recording and notary fees per Settlor, includes the grant deed, the PCOR form (BOE-502-A), and the Prop 19 exclusion form (BOE-19-P) needed to transfer your primary residence into your trust correctly.
HomeTrust's documented Prop 19 support is scoped to funding your own trust. Parent-to-child transfer planning (which uses a different form, BOE-58-AH) is a more complex situation best discussed with an attorney.
Capital Gains Tax and the Step-Up in Basis
Here's where trusts help families save money, even without a dedicated "trust tax break."
Under IRC Section 1014, inherited assets get a new cost basis equal to fair market value on the date of death. This is the step-up in basis, and it can eliminate decades of paper gains for tax purposes.
Example: Your parents bought their San Diego home in 1985 for $120,000. Today it's worth $950,000. If you inherit it, your basis isn't $120,000; it's $950,000. Sell it soon after, and you owe little or no capital gains tax on that appreciation.
California's community property rules make this even better for married couples:
- When one spouse dies, both halves of a jointly-owned community property asset get a full step-up in basis
- Compare that to many common-law states, where only the deceased spouse's half gets stepped up
- This applies per IRS Publication 555
This benefit isn't exclusive to trusts. Assets held individually also get the step-up. What the trust adds is a smoother path: it bypasses probate delays that can complicate basis calculations and slow the eventual sale.
Does a Living Trust Prevent Inheritance Tax and Avoid Probate?
Short answer: a living trust doesn't "prevent" an inheritance tax, because California doesn't have one to prevent. The real value of a trust is probate avoidance, and that value is substantial.
Assets titled correctly in a living trust bypass the probate court process entirely. Without a trust, California probate typically takes 9 to 18 months, according to California Courts, and often longer.
The cost adds up too. California's statutory attorney fee schedule under Probate Code section 10810 works like this:
| Estate value tier | Statutory fee |
|---|---|
| First $100,000 | 4% |
| Next $100,000 | 3% |
| Next $800,000 | 2% |
| Next $9,000,000 | 1% |
Note that this table only covers attorney fees. The personal representative is entitled to an equivalent fee under a matching schedule, effectively doubling the statutory cost in many cases. On a $500,000 estate, attorney fees alone run about $13,000; matching representative fees can push the combined statutory cost near $26,000 before court costs.
The catch: a trust only avoids probate for assets actually titled in its name. An unfunded trust (one where the deed was never transferred or accounts were never retitled) still sends those assets straight through probate court, defeating the entire purpose.
What Should You Not Put in a Living Trust?
Not everything belongs in a trust. A few asset types should stay out:
- Retirement accounts (IRAs, 401(k)s, 403(b)s) — retitling these into a trust can trigger immediate income tax on the full balance. Use a beneficiary designation instead.
- Life insurance policies — name the trust as beneficiary rather than transferring ownership.
- Health savings accounts (HSAs) — keep them in your name and designate a beneficiary; do not retitle the account into the trust.
- Certain vehicles — often better handled with transfer-on-death registration or other simple title processes instead of trust funding.
For retirement accounts specifically, inherited IRA withdrawals are taxed as ordinary income once distributed, according to IRS Publication 590-B. The trust can still be named as a secondary or contingent beneficiary, but the account itself stays personally owned.
How HomeTrust Helps California Homeowners Fund and Maintain Their Trust
Creating a trust document is step one. Funding it correctly is what actually delivers probate avoidance and the related tax protections, and that's where a lot of DIY trusts and even attorney-prepared trusts fall short.
Marco Mariani has operated HomeTrust in San Diego since 1992, personally preparing more than 10,000 California trusts as a Licensed Document Assistant (LDA #231). Clients work directly with Marco rather than a call center.
The flat-rate individual package, starting at $409 / settlor plus recording and notary fees per Settlor, includes:
- Complete California revocable living trust
- Pour-over will
- Durable power of attorney
- Advance healthcare directive
- Grant deed transferring your primary residence into the trust
- Certificate of trust, PCOR form, and Prop 19 exclusion form
- Step-by-step funding checklist for retitling accounts and other assets
Documents are typically ready in 1–3 business days, with notary and county recorder fees billed separately.
For homeowners with an existing trust that was never properly funded (whether prepared by an attorney, LegalZoom, or elsewhere), HomeTrust's Trust Rescue service reviews the trust, identifies unfunded assets, and prepares the missing deeds and updates.
Frequently Asked Questions
Do you have to pay taxes on money inherited from a living trust in California?
No state inheritance tax applies to trust distributions of principal. However, income the trust generates and distributes to you — like rental income or dividends — is taxable as personal income.
How much can you inherit from a living trust without paying taxes in California?
There's no state threshold since California has no inheritance tax. The relevant figure is the federal estate tax exemption: $13,990,000 for 2025, rising to $15,000,000 in 2026.
Does a living trust prevent inheritance tax in California?
California already has no inheritance tax to prevent. A living trust's real benefit is avoiding probate court, not avoiding a tax that doesn't exist.
Does a living trust avoid probate in California?
Yes, if it's properly funded. Assets correctly titled in the trust's name bypass probate entirely. Unfunded assets still go through the probate process.
Does putting my house in a living trust change property taxes in California?
No. Transferring your home into your own revocable trust during your lifetime doesn't trigger Prop 13 reassessment. Your assessed value stays the same.
What should you not put in a living trust in California?
Retirement accounts like IRAs and 401(k)s, life insurance policies, and HSAs generally stay out of the trust. These pass through beneficiary designations instead.
