Generally speaking, inheritance is not subject to tax in California. If you are a beneficiary, you will not have to pay tax on your inheritance. There are a few exceptions, such as the Federal estate tax. However, an estate must exceed $11.58 million dollars per person in 2020 to be subject to estate tax in the U.S. The estate tax is paid out of the estate, so the beneficiaries will not be liable for paying the estate tax, technically speaking—although it would deplete the amount left in the estate for distribution.
With the exception of the estate tax for estates exceeding $11.58 million dollars per person, California does not have a state-level inheritance tax. That is not true in every state. Some states have enacted inheritance taxes on estates of any size.
When does inheritance become taxable
If your inheritance is in Trust, a portion of the income might be subject to income tax. If the trust generates income after the trust creators (the “Grantors” or “Settlors”) pass away, the new income will be subject to income tax. For example, if the Trust owns a rental property, the rental income is subject to income tax. However, when the house is sold, the beneficiaries do not pay tax on the proceeds. Income tax only applies to income generated after the Grantors pass away, not the principal (the amount originally received).
If you receive an inheritance in California, consider yourself lucky. You can receive your California inheritance without anticipating major tax liability in most cases.