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Inheriting assets from a parent or loved one is both a meaningful gesture and a financial responsibility that comes with real deadlines, tax consequences, and paperwork. For California beneficiaries, the rules can feel overwhelming — especially when the estate includes a home, a revocable living trust, and multiple retirement accounts.
The good news is that California has no state inheritance tax and no state estate tax. But that does not mean inheriting assets is tax-free. Depending on what you inherit and how you handle it, you may face capital gains taxes, property tax reassessments, ordinary income taxes on retirement distributions, and significant penalties for missing deadlines.
This guide breaks down exactly what beneficiaries can expect — and what they need to do — when inheriting residential real estate, trust accounts, and retirement accounts including 401(k)s, Traditional IRAs, and Roth IRAs in California.
Before diving into each asset type, it is important to set the right expectations. California eliminated its inheritance tax decades ago. Beneficiaries in California do not pay a state tax simply for receiving assets. There is also no California estate tax.
However, the federal estate tax does apply to very large estates. For 2026, the federal estate tax exemption is $15 million per person — a permanent increase signed into law by the One Big Beautiful Bill Act in July 2025. Estates valued below this threshold generally owe no federal estate tax. Only the portion above $15 million is generally subject to the 40% federal estate tax rate. For the majority of California families, federal estate tax will not be a concern.
What beneficiaries do need to worry about are asset-specific taxes: capital gains taxes on real estate, ordinary income taxes on retirement account distributions, and California's unique property tax rules under Proposition 19.
When you inherit residential real estate in California, you generally receive what is known as a stepped-up basis. This resets your cost basis in the property to its fair market value on the date of the owner's death — not the original purchase price.
Here is why this matters. If your parents bought their home in 1985 for $200,000, and the property is worth $1.5 million when they pass away, your new cost basis is $1.5 million. If you sell the home shortly after inheriting it at or near that value, you owe little to no capital gains tax on the sale. By contrast, if your parents had gifted you the home while they were alive, you would have inherited their original $200,000 cost basis — and potentially owed capital gains taxes on $1.3 million of appreciation.
The step-up in basis is one of the most powerful tax benefits in estate planning, and it is especially valuable in California, where real estate has appreciated dramatically over the last couple decades.
If you hold the inherited property and later sell it, your capital gain is calculated based on the difference between your stepped-up basis and the eventual sale price. California generally taxes capital gains as ordinary income — there is no preferential capital gains rate at the state level — meaning combined federal and state capital gains taxes can exceed 37% for high earners on a property held in trust.
Important: To protect this step-up, you may consider a professional appraisal as close to the date of death as possible. This establishes the fair market value and prevents costly IRS disputes down the road.
One of the most significant — and often surprising — tax consequences of inheriting California real estate involves property taxes, not income taxes.
Under Proposition 19, which took effect in 2021, the rules for inheriting a parent's property tax assessment changed dramatically. Before Prop 19, children could inherit their parents' home and retain the low assessed value under Proposition 13, regardless of whether they lived in the home. That protection is largely gone.
Under current law, to avoid a full property tax reassessment on an inherited home, the child must:
Even then, the exclusion is capped. For transfers occurring between February 16, 2025 and February 15, 2027, property tax reassessment can be avoided only up to $1,044,586 above the parent's existing assessed value. If the market value of the home exceeds this combined amount, a partial reassessment may occur.
If the inherited property is a rental, vacation home, or any property that is not the parent's primary residence, it may be fully reassessed to current market value — which in high-cost California markets can mean a dramatic increase in annual property taxes.
If the home passes through a revocable living trust, the successor trustee(s) generally handles the transfer of title to beneficiaries without going through probate. The process involves recording an Affidavit of Death of Trustee, along with the death certificate, with the county recorder's office where the property is located. The successor trustee then transfers title by recording a new grant deed.
If the home passes through a will or probate, the process may be more involved. An estate must be opened with the probate court, and the court ultimately issues an order that allows the executor to transfer title via a court-authorized deed.
Heirs should file a Preliminary Change of Ownership Report (PCOR) with the county assessor at the time of transfer. This form helps the county determine whether a property tax reassessment applies. If you are claiming the Proposition 19 parent-child exclusion, an additional form — BOE-19-B — must generally be filed within three years of the date of death or before the property is transferred again, whichever comes first. It is generally advised to have an estate planning attorney help with this process.
When a parent holds a taxable investment account — a brokerage account holding stocks, bonds, mutual funds, or ETFs — inside a revocable living trust, the assets generally receive the same stepped-up basis at death as real estate.
This means if the trust held $500,000 in Apple stock that was originally purchased for $50,000, your inherited cost basis resets to $500,000. Any subsequent growth above that amount is what you will eventually owe capital gains taxes on when you sell.
The successor trustee administers the trust and distributes assets to beneficiaries as directed by the trust document. If you are a beneficiary receiving trust assets outright, the custodian (Charles Schwab, Fidelity, Vanguard, etc.) will typically need the following to retitle or transfer the account:
Most custodians can complete this process in a few weeks.
Inheriting a 401(k) comes with immediate tax implications and some strict deadlines. Unlike a home, you do not get a step-up in basis. Every dollar you withdraw from an inherited 401(k) is taxed as ordinary income in the year you take it.
Surviving spouses have the most flexibility. A spouse can generally roll the inherited 401(k) directly into their own IRA and treat it as their own account. This delays required minimum distributions (RMDs) until they reach age 73, and allows the funds to continue growing tax-deferred.
Non-spouse beneficiaries — including adult children — face stricter rules under the SECURE Act of 2019. Most non-spouse beneficiaries must fully withdraw the account within 10 years of the original owner's death. This is known as the 10-year rule.
An important nuance: if the original 401(k) owner had already begun taking RMDs (meaning they were past age 73), the beneficiary may be required to take annual distributions during years one through nine — not just empty the account by year ten. Missing these annual distributions may trigger an IRS penalty on the amount that should have been taken.
Non-spouse beneficiaries cannot roll an inherited 401(k) into their own IRA. Instead, you generally have two options:
To transfer to an inherited IRA, contact the 401(k) plan administrator and your chosen custodian. You will need to provide a death certificate, proof of your identity, and complete both the plan's distribution paperwork and the custodian's inherited IRA account opening forms.
Deadline: The IRS does not usually have a hard deadline for completing the retitling itself, but the 10-year distribution clock begins the year after the account owner's death. You should initiate the transfer as soon as possible — many advisors recommend within 90 days — to avoid plan-imposed forced distributions and preserve the most flexibility.
The rules for an inherited Traditional IRA closely mirror those for an inherited 401(k), with one key difference: the account can be transferred directly to an Inherited IRA at any custodian without going through an employer plan.
All distributions from an inherited Traditional IRA are taxed as ordinary income. This can have significant implications for high-income beneficiaries in California, where the top state income tax rate is 13.3%.
Most non-spouse beneficiaries must empty the account by December 31 of the tenth calendar year following the year of death. If the original owner had already begun RMDs, annual distributions may also be required during years one through nine.
Eligible designated beneficiaries — including surviving spouses, minor children of the deceased, disabled individuals, chronically ill individuals, and individuals not more than 10 years younger than the deceased — may qualify for an exception and can instead take distributions over their own life expectancy.
The account must be retitled as an Inherited IRA in the beneficiary's name (your new account custodian can help with the correct titling format).
To complete the retitling, contact the custodian and provide:
Most custodians complete this process within a few weeks. There is no strict deadline for establishing the inherited account itself, but distribution deadlines begin counting from the year of death regardless of when the account is formally retitled. You should act promptly — within 90 days — to preserve distribution options.
Tax planning note: Rather than taking a large lump-sum distribution in one year, many beneficiaries benefit significantly from spreading withdrawals strategically across the 10-year window. This keeps annual taxable income lower and avoids being pushed into higher federal and California income tax brackets. This is a planning opportunity that should be discussed with your financial advisor and tax professional.
Inheriting a Roth IRA is generally the most tax-favorable scenario of any retirement account. Because the original owner already paid taxes on their contributions, qualified distributions to beneficiaries are generally tax-free.
Non-spouse beneficiaries of a Roth IRA are still subject to the 10-year rule — the account must be emptied by December 31 of the tenth year following the owner's death. However, unlike a Traditional IRA:
This gives beneficiaries of inherited Roth IRAs maximum flexibility. A common strategy is to let the inherited Roth continue growing tax-free for the full 10-year period, then take a single tax-free lump-sum distribution at the end.
The process is identical to retitling a Traditional IRA. The account must be transferred to an Inherited Roth IRA in the beneficiary's name at a custodian of your choice. The same documentation is generally required: certified death certificate, beneficiary ID, and a completed account opening and transfer form.
Important: If you roll an inherited Roth IRA into your own Roth IRA (which is generally only available to surviving spouses), the five-year holding clock restarts from your own account's inception date. Non-spouse beneficiaries cannot combine an inherited Roth IRA with their own Roth IRA.
Inheriting assets in California does not trigger a state inheritance tax — but it does trigger a set of responsibilities, deadlines, and planning decisions that can have significant long-term financial consequences. Missing an RMD deadline, failing to claim the Proposition 19 exclusion correctly, or taking a poorly timed lump-sum distribution from a Traditional IRA can cost heirs tens of thousands of dollars unnecessarily.
The good news is that with the right planning, most of these costs can be minimized or avoided entirely. A stepped-up basis on real estate, tax-free distributions from an inherited Roth IRA, and strategic 10-year distribution planning for a Traditional IRA all represent real opportunities to preserve more of what your loved ones worked to leave behind.
None of the information provided herein is intended as investment, tax, accounting, or legal advice. Your use of this information is at your sole risk. Consult with qualified professionals regarding your specific situation.
Grant Webster, CFP®, TPCP®
Founder, Wealth Advisor