Inheritance Tax Planning for California and Washington Families: 5 Steps

By Kevin Luu, Co-Founder and Chief Learning Officer. Reviewed on 2026-09-30.

If you live in California or Washington, there is no inheritance tax to plan for: neither state taxes heirs on what they receive, and there is no federal inheritance tax either. The taxes that do apply are the federal estate tax (only on estates above $15,000,000 per person for 2026) and, for Washington residents, a state estate tax that starts at $3,000,000 for deaths on or after July 1, 2026. Good inheritance tax planning for these families is really five things: know which tax applies, use the step-up in basis, protect Washington’s exclusion at the first death, keep life insurance and retirement accounts from creating surprises, and write down the reasoning for whoever settles the estate.

For a household earning $750,000 to $3 million with RSUs, a house in the Bay Area or on the Eastside, and two kids under 12, the gap between doing this and not doing it can be several hundred thousand dollars in Washington, and a large capital gains bill in either state. The worked examples below show where the money is.

Inheritance tax vs. estate tax: what California and Washington actually charge

An inheritance tax is charged to the person who receives money. An estate tax is charged to the estate before anything is distributed. The difference matters because most of the “inheritance tax” advice online is written for a handful of other states, or for other countries, and does not apply to you.

The federal exclusion is no longer scheduled to drop in 2026. The One Big Beautiful Bill Act set it at $15,000,000 per person for 2026 and indexes it from 2027, so a married couple can shelter up to $30,000,000 if the executor of the first spouse’s estate elects portability on a timely Form 706. Many families in our reader group sit below that. In California, that usually means no estate tax at all. In Washington, it means the state tax is the one that bites.

Step 1: Work out which tax your family is actually exposed to

Start with a simple list of everything either parent owns or controls, at today’s value: home equity, brokerage and vested RSU shares, 401(k)s and IRAs, cash, deferred compensation and any life insurance policy the parents own on their own lives. Washington’s estate tax return includes life insurance policies the decedent owned, including policies on their own life (WA DOR estate tax FAQ). People are often surprised that a $2 million term policy bought “for the kids” can push an estate over the line.

• California family, total under $15,000,000 per parent: no estate tax today. Your planning is about income tax for your heirs, guardianship and who controls money for minor children.
• Washington family, total over $3,000,000: state estate tax is likely at the second death unless you plan for it. This is most of our Washington readers once insurance and retirement accounts are counted.
• Either state, moving between them: the Washington tax follows domicile, and it also reaches non-residents who own Washington real estate or tangible property (WA DOR). A California family with a cabin in the San Juans should know that.

Step 2: Use the step-up in basis, especially on community property

When someone dies, the basis of property they leave is generally reset to its fair market value on the date of death (IRS). Gains built up during the owner’s life generally escape income tax. California and Washington are both community property states, and for community property the full value, including the surviving spouse’s half, generally becomes the new basis when the first spouse dies (IRS Publication 555).

Worked example: Bay Area couple with concentrated stock

Assumptions (illustrative): a married couple in San Mateo County, combined W-2 income of $1.1 million, held as community property. They own employer shares from years of RSU vests with a basis of $400,000, now worth $2,000,000. One spouse dies.

• If the shares are titled as community property, the basis of all the shares resets to $2,000,000. The survivor can sell and diversify with roughly no gain.
• If the survivor had sold the same shares a day before the death, the $1,600,000 gain would be taxed. At the top rates (20% federal long-term gains plus 3.8% net investment income tax for 2026, plus California’s 13.3% top rate for 2025, since California has no lower rate for gains), that is as much as roughly $594,000; the exact figure depends on where the gain falls in each bracket.

The planning point: how accounts are titled matters. Brokerage accounts held as “joint tenants” instead of community property, or assets moved into the wrong kind of trust, can lose part of this. It is also a reason not to rush lifetime gifts of your most appreciated shares to children: a gift carries your old basis, an inheritance generally does not.

Step 3: In Washington, protect the first spouse’s exclusion

Federal law lets a surviving spouse use the unused federal exclusion of the spouse who died, if the executor files a timely Form 706 (Form 706 instructions). Washington does not: “Washington law does not have, nor does it incorporate, the federal provisions of portability for estate tax” (WA DOR). If a simple will leaves everything to the surviving spouse, the first spouse’s Washington exclusion ($3,000,000 for deaths on or after July 1, 2026) is wasted.

Worked example: Seattle couple, second death after July 1, 2026

Assumptions (illustrative): an Amazon executive and a physician in Bellevue, combined income about $1.2 million, two children ages 4 and 8. Their estate: $2,500,000 home equity, $2,000,000 in brokerage and vested RSU shares, $1,200,000 in 401(k)s, and $2,500,000 of term life insurance they own on their own lives. Total $8,200,000. Figures ignore growth, debts and expenses, and use the Washington rate table for deaths on or after July 1, 2026.

How the numbers work: on $5,200,000 the table charges $550,000 plus 18% of the amount over $4,000,000, so $766,000. On $2,200,000 it charges $240,000 plus 15% of the amount over $2,000,000, so $270,000. The credit shelter (or “bypass”) trust holds the first spouse’s share for the survivor’s benefit without being counted in the survivor’s estate. Moving the insurance into an irrevocable life insurance trust takes it out as well, but Washington adds back certain transfers made within three years of death, so a new policy bought by the trust is usually cleaner than transferring an old one.

The trade-off: assets in a credit shelter trust do not get a second step-up when the survivor dies. A good drafting attorney can build in flexibility (for example a disclaimer or a Washington-only QTIP election, which Washington allows separately from the federal one) so the survivor can choose once the facts are known.

Step 4: Plan for the taxes your children will pay

Even with no estate tax, heirs can owe income tax. Inherited traditional 401(k) and IRA money is taxed as ordinary income when withdrawn, and most non-spouse beneficiaries must empty the account within 10 years (IRS Publication 590-B). A $1,200,000 401(k) left to a child who is a high earner in California could be taxed at close to the top federal and state rates. Roth accounts are generally received income tax free. For families who expect large retirement balances, Roth conversions in lower-income years and naming the right beneficiaries are worth a conversation.

For young children, the bigger issue is control. An 8-year-old cannot own a brokerage account outright. Naming a trust as beneficiary, rather than the child, lets you choose who manages the money and when your children get it. Our guide to naming a trust as beneficiary of your brokerage account covers the mechanics.

Step 5: Know the deadlines and write down your reasoning

Estate tax does not have to be paid the day someone dies, but it does not wait long. The federal Form 706 is due nine months after death, with an automatic six-month extension to file available on Form 4768 (IRS). Washington’s return and payment are due nine months after the date of death (WA DOR). In California, a surviving spouse should still consider filing a Form 706 within nine months to elect portability of the federal exclusion, even when no tax is due. If that deadline is missed, IRS Revenue Procedure 2022-32 generally allows a portability-only return up to the fifth anniversary of the death (Form 706 instructions).

Then document it. The executor, the trustee and eventually your children will need to know why the plan looks the way it does: why the house went into the trust, why one account names a trust and another names your spouse, why you kept the insurance. A one-page Decision Memo stored with the documents saves the next generation a great deal of guessing.

What to document for your children

As Kevin Luu puts it: “Your kids will inherit your money. Will they inherit your judgment?” The estate plan answers who gets what. It does not answer how you thought about it. In the FamilyKnowledge® Library, families record three things alongside the legal documents: what each trust is for, the values behind when the children receive money, and who to call first. Conversations fade. Documentation compounds.

Questions families ask about inheritance tax

Do I have to pay tax on money I inherit?

Generally no, not at the federal level, and not in California or Washington. Inherited cash is not income to you. You may owe tax later: on gains if you sell inherited assets for more than their date-of-death value, on withdrawals from an inherited traditional IRA or 401(k), and on any interest or dividends the money earns after you receive it.

Does California have an estate tax?

No. California has had no estate tax for deaths on or after January 1, 2005, and it has no inheritance tax. A California family only faces federal estate tax if an estate is over $15,000,000 per person for 2026. Income tax for heirs, and who controls money for minor children, are usually the bigger issues.

Does inheritance tax have to be paid immediately?

No. For estates that owe it, federal estate tax and Washington estate tax are both due nine months after the date of death. The executor can get extra time to file the federal return, but interest generally runs on tax paid late, so the estate needs a plan for cash, often life insurance or liquid investments.

Next step

Add up your estate the way Washington would, including insurance you own, and compare it with $3,000,000 (Washington) or $15,000,000 per person (federal). If you are over, or your will predates your children, bring that list to an estate attorney. Our questions to ask an attorney about inheritance and our walkthrough on calculating inheritance tax will help you prepare. Families who want this coordinated with RSU, tax and insurance decisions can start with a Tax & Wealth Assessment through our estate planning and tax management work at Age Five Family Office™.

This article is general education, not individual tax or legal advice; the right move depends on your family’s full picture.

Written by

Kevin Luu

Co-Founder and Chief Learning Officer, Bright Advisers

Kevin has advised high-income W-2 tech and biotech families since 2015, and leads the education-first Age Five Family Office from Brea, California.

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