The Introduction of Senate Bill 378

Important Update on Senate Bill 378:

In May, Senate Bill 378 failed to receive a floor vote. Many were confident that Senate Bill 378 would pass. However, it has been concluded that the California Estate Tax Bill 378 will not be reinstated into the California Legislature and will not be appearing on the 2020 ballot. Currently, there is a very long road for a bill to become a law in California. A state estate tax bill in one form or another could always reappear next year, but the state’s current political process might still keep such a bill from being considered.

Our professionals always proactively watch for anything that could impact our clients and while SB 378 did not come through this time, we are keeping an eye on it for future impact.

The Introduction of Senate Bill 378

Senate Bill 378 has been introduced in the California Legislature providing for the reinstatement of an estate tax and the imposition of new gift and generation-skipping transfer tax (collectively, “Transfer Taxes”) on California residents beginning January 1, 2021.

Currently, there are no California Transfer Taxes payable by a California resident or by a non-resident who owns property in California.

What is a California estate tax?

The bill is similar in structure and rules of the Federal Transfer Taxes, but with a significantly lower exclusion rate of $3,500,000. A 40% tax rate would be imposed on gifts and estate of California residents dying on or after January 1, 2021. The tax phases out at the current federal estate tax exemption of $11,400,000 – thus avoiding double taxation.

The revenue generated by the California Transfer Tax would be deposited into a Children’s Wealth and Opportunity Building Fund, funding programs and services that directly address and alleviate socio-economic inequality and build assets among people who have historically lacked them, including helping low-income children build wealth through savings accounts.

If SB 378 passes, it will appear on the November 2020 ballot.

What can be done to avoid/alleviate the California estate tax?

Given that the Federal Estate tax exemption is at an all-time high of $11,400,000 for 2019, it is an opportune time to gift and/or sell assets out of your estate. Selling assets to an intentionally defective grantor trust is an effective way to remove assets from your estate. There is no gain on the sale since you are the grantor of the trust. You continue to earn income on the assets sold. This income is used to pay the note to the trust.

If you would like to discuss estate planning options in more detail, our estate and trust team would be happy to meet with you.