Do You Pay Inheritance Tax On a Trust in California?

California does not have an inheritance tax, and neither does the federal government. As of 2026, the only federal tax triggered by a death is the estate tax, and it applies only to estates worth more than $15 million per person. Most people who inherit from a California trust will never pay either one.

Taxes can still reach an inheritance after it lands, though. A California trust beneficiary can owe income tax on what the trust earns, capital gains tax when selling inherited property, income tax on inherited IRA withdrawals, and higher property tax on an inherited house under Prop 19. Here’s how each one works, with the 2026 numbers.

Inheriting a home or trust assets in California? Talk to our trust and estate team at 310.889.0233 before you sell, retitle, or miss the Prop 19 filing deadline.

Does California Have an Inheritance Tax?

No. California has had no inheritance tax since 1982, when voters passed Proposition 6 and repealed both the state inheritance tax and the state gift tax. California has no state estate tax either. A California resident who inherits cash, a house or an investment account doesn’t file a state inheritance tax return or owe the state anything because of the inheritance itself.

The inheritance isn’t income on your federal or California return either. The IRS confirms that property you receive as a gift or inheritance is not included in your income. What gets taxed is what that property earns or gains after it reaches you.

Inheritance Tax vs. Estate Tax: What’s the Difference?

An inheritance tax is charged to the person who receives property, and its rate usually depends on how closely related the heir was to the person who died. An estate tax is charged to the estate itself, before anything is distributed, and is based on the total value of everything the person owned at death. The federal government has an estate tax but no inheritance tax. There is no “federal inheritance tax,” whatever older guides say.

The federal estate tax exemption is $15 million per person for deaths in 2026, under the One Big Beautiful Bill Act signed in July 2025. The law made the higher exemption permanent (the scheduled 2026 drop to roughly half never happened), and the amount is indexed to inflation each year. See the IRS estate tax overview and Rev. Proc. 2025-32 for the official figures.

Several rules shrink the taxable estate further. The marital deduction lets everything left to a surviving U.S.-citizen spouse pass tax-free, with no dollar limit, and the charitable deduction does the same for gifts to qualified charities. Through portability, a surviving spouse can take over the first spouse’s unused exemption (the DSUE amount), so a married couple can shelter $30 million. The executor has to file Form 706 to claim it, even when no tax is due. Lifetime gifts above the annual gift tax exclusion, which is $19,000 per recipient in 2026, use up part of the same $15 million and get reported on Form 709. Most people never pay gift tax.

When estate tax is owed, the trustee or executor pays it from estate assets before distributing anything. Beneficiaries don’t send the IRS a separate check. Larger estates usually stay under the line through estate planning that combines gifting, trusts and portability.

Do You Pay Taxes on Money Inherited From a Trust?

A California trust beneficiary generally pays no income tax on distributions of trust principal, but does pay income tax on distributions of trust income. Principal is the property the grantor put into the trust: the house, the brokerage account, the savings. Income is what that property earns after the grantor’s death, such as interest, dividends and rent.

The tax code sorts the two using distributable net income (DNI), which caps how much of any distribution can be taxed to the beneficiary as income. The process works like this:

1. Once the grantor dies, the trust has its own tax ID. Each year the trustee files Form 1041 with the IRS and Form 541 with the California Franchise Tax Board.
2. When the trustee distributes income, the trust deducts it and issues each beneficiary a Schedule K-1 showing how much income to report, and what kind.
3. The beneficiary reports the K-1 amounts on their own return, at their own rates.
4. Income the trust keeps is taxed to the trust.

A trustee who won’t send K-1s or explain the trust’s accounting is breaching a legal duty, and that’s a common starting point for trust litigation.

That last step is costly, because trusts are taxed under compressed trust tax brackets:

A trust hits the 37% top rate at $16,000. A single filer doesn’t reach it until income passes $640,600. So if a trust earns $40,000 and distributes $25,000 to a beneficiary, the beneficiary reports $25,000 at their own (usually lower) rate. The trust pays tax on roughly the $15,000 it kept. Our separate guide on whether trust distributions are taxable walks through more examples.

Revocable vs. Irrevocable Trusts: How the Tax Treatment Differs

A revocable living trust is ignored for income tax purposes while the grantor is alive. It is a grantor trust: it uses the grantor’s Social Security number, and the grantor reports all of its income on their personal Form 1040. When the grantor dies, the trust becomes irrevocable, gets its own EIN, and the trustee starts filing Form 1041. The assets stay in the grantor’s taxable estate, so beneficiaries get a full step-up in basis. This is one of the main reasons a living trust is the standard California plan.

An irrevocable trust follows different rules, and they depend on how the trust was drafted:

• Grantor irrevocable trust: the assets are out of the grantor’s estate, but the grantor still pays the trust’s income tax while alive.
• Non-grantor irrevocable trust: the trust is its own taxpayer from the day it’s funded. It files Form 1041, pays the compressed rates on income it keeps, and passes income out to beneficiaries through DNI.

The step-up is the bigger issue. In Rev. Rul. 2023-2, the IRS ruled that assets in an irrevocable trust that are not included in the grantor’s taxable estate do not get a step-up in basis at death. Beneficiaries take over the grantor’s original basis instead. If an irrevocable trust holds a house bought in the 1980s, the heirs could face a large capital gain on a sale.

Which structure fits depends on the size of the estate and what you want to protect. That’s a question for a wills and trusts attorney who can look at your actual numbers.

Inheriting a House in a Trust in California: Prop 19 and Property Tax

Prop 19 is why many heirs pay more tax after inheriting a California house, even though the state has no inheritance tax. For transfers on or after February 16, 2021, an inherited home is reassessed to current market value unless it qualifies for the parent-child exclusion, which is far narrower than the old Prop 58 rule it replaced. Holding the house in a living trust doesn’t avoid this. A trustee’s distribution of a parent’s house to a child is treated as a parent-to-child transfer.

To keep the parent’s low assessed value, all four of these must be true:

1. The transfer is from parent to child (or grandparent to grandchild; see below).
2. The house was the parent’s principal residence.
3. The child makes the home their own principal residence within one year and files for the homeowners’ exemption (Form BOE-266) within one year.
4. The child files Form BOE-19-P with the county assessor within three years of the date of death, or before the property is transferred to a third party, whichever comes first.

There’s also a value cap. The exclusion protects value only up to the parent’s assessed value plus $1,044,586 (the figure for transfers between February 16, 2025 and February 15, 2027, adjusted every two years). Any market value above that is added to the new assessment.

Worked example. A parent’s El Segundo home is assessed at $300,000, and its market value is $1.5 million when the parent dies in 2026.

Rentals, vacation homes and other property that wasn’t the parent’s home get no exclusion at all (qualifying family farms are the exception). Grandparent-to-grandchild transfers qualify only if the grandchild’s parent, the grandparent’s own child, has died by the date of transfer. Those claims use Form BOE-19-G and have the same deadlines. The BOE’s Prop 19 page has the forms and county assessor contacts.

[SCREENSHOT: BOE Prop 19 page showing the $1,044,586 adjustment table. It proves the current figure and shows readers where to check it.]

Sibling buyouts, a sale soon after inheriting, and refinancing can each change the result. Get advice on real estate transactions before you sign anything.

Prop 19 deadlines don’t wait for the trust to close. Call Stone & Sallus at 310.889.0233 to make sure the move-in, homeowners’ exemption and BOE-19-P filings are done in time.

Capital Gains When You Sell Inherited Property

Capital gains tax on inherited property is measured from the property’s value on the date of death, not from what the original owner paid. This step-up in basis (see IRS Publication 551) means only appreciation after death is taxed. Inherited property is also always treated as long-term, however soon you sell.

Worked example. A mother bought her Torrance home for $180,000 in 1988 and held it in her revocable living trust. It’s appraised at $1,200,000 at her death in 2026. Her son sells it eight months later for $1,250,000 and pays $65,000 in selling costs.

Without the step-up, that $1,005,000 gain would face federal long-term rates of up to 20%, plus the 3.8% net investment income tax for higher earners. California taxes capital gains as ordinary income, at rates up to 13.3%.

California residents have one more advantage. When a married spouse dies, both halves of community property get the full step-up, not only the deceased spouse’s half. The surviving spouse can then sell with little or no gain, but only if the asset is properly titled as community property, which is one of the details a good estate plan gets right. Get a date-of-death appraisal for every significant asset, because that appraisal becomes your basis.

Inherited IRAs and Retirement Accounts Held in or Through a Trust

An inherited IRA or 401(k) is the main exception to the rule that inheritances aren’t income. Withdrawals from an inherited traditional IRA are taxed as ordinary income to whoever takes them, because that money was never taxed. Inherited Roth withdrawals are generally tax-free once the account has been open five years.

Under the SECURE Act 10-year rule, most non-spouse beneficiaries must empty an inherited account by the end of the tenth year after the owner’s death. If the owner had already started required minimum distributions, the beneficiary also generally has to take annual withdrawals in years one through nine. Surviving spouses, minor children of the owner, disabled or chronically ill beneficiaries, and beneficiaries not more than 10 years younger than the owner get more flexible rules (IRS beneficiary rules).

When a trust is named as the beneficiary, the trust’s drafting matters:

• A conduit trust passes withdrawals straight to the beneficiary, who pays tax at their own rate.
• An accumulation trust can keep withdrawals, and retained amounts over $16,000 are taxed at 37%.

Coordinating beneficiary designations with your trust is part of retirement planning, and it’s much cheaper to fix while the account owner is alive.

Can You Owe Another State’s Inheritance Tax?

Yes. A California heir can owe inheritance tax to another state if the person who died lived there, or in many cases owned real estate there. Five states still have an inheritance tax in 2026 (Iowa’s ended for deaths on or after January 1, 2025):

Pennsylvania catches the most California families off guard. It taxes what children inherit at 4.5%, so a Los Angeles daughter inheriting $400,000 from a mother in Philadelphia could owe about $18,000. These taxes are usually paid out of the estate or deducted from the heir’s share before distribution. If an out-of-state relative’s estate is handled through a will rather than a trust, California property may also need probate here.

Protecting Your Inheritance

An inheritance can also shrink through creditors, divorce or a family fight.

• Creditors. Once money is distributed to you, your creditors can reach it. Assets that stay inside a trust with a spendthrift clause generally can’t be reached by a beneficiary’s creditors until they’re paid out. Talk to us about asset protection if this is a concern.
• Divorce. An inheritance is your separate property in California. Depositing it into a joint account or using it to pay down a shared mortgage can blur that line. Keep it in an account in your name alone, or address it in a prenuptial or postnuptial agreement.
• Family disputes. Arguments over undue influence, a last-minute trust amendment, or a trustee who won’t account for the assets are common. California trustees have a duty to keep beneficiaries informed and to account. Once a trustee sends the formal notice that the trust has become irrevocable, a beneficiary generally has 120 days to contest the trust. If you’re facing that deadline, speak with a trust litigation attorney now. Our inheritance dispute team handles these cases across Los Angeles County.

Frequently Asked Questions

How much can you inherit in California without paying taxes?

You can inherit any amount in California without paying an inheritance tax, because the state doesn’t have one. The federal estate tax applies only to estates worth more than $15 million in 2026, and it’s paid by the estate, not the heir. Tax can still apply later to income the inheritance earns, gains on a sale, or withdrawals from an inherited IRA.

Do beneficiaries pay taxes on trust distributions?

Beneficiaries pay income tax only on the part of a trust distribution that comes from trust income, which is reported to them on a Schedule K-1. Distributions of principal, meaning the original assets placed in the trust, are not taxable to the beneficiary.

How do I avoid property tax reassessment on an inherited home?

Under Prop 19, you can avoid reassessment of an inherited California home only by qualifying for the parent-child exclusion. To qualify, you move in as your principal residence and file for the homeowners’ exemption within one year, and you file Form BOE-19-P within three years. Value above the parent’s assessed value plus $1,044,586 is still reassessed, and rentals and second homes don’t qualify.

Do I report an inheritance on my tax return?

You don’t report the inheritance itself on your federal or California tax return. You do report income connected to it, such as Schedule K-1 amounts, inherited IRA withdrawals and gains when you sell. The exception is an inheritance from a foreign person totaling more than $100,000 in a year, which must be reported on Form 3520. Reporting it doesn’t create a tax.

Talk to a California Trust and Estate Attorney

The Prop 19 filings, the timing of a sale and how a trustee handles distributions are all hard to undo. Stone & Sallus advises California beneficiaries and trustees on each of them. Inheriting a home or trust assets in California? Talk to us before you sell, retitle, or miss the Prop 19 filing deadline. Call 310.889.0233 or contact our team.