A California Estate Tax Return, Form ET-1, must be filed by the Executor of an estate in California if the estate is required to file a federal estate tax return. The required Internal Revenue Service tax form is form 706.
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California Estate Tax
You avoid California estate tax if an assets is devised to either your spouse, who is a US citizen, or to charitable organization by your Will. Assets passing to other individuals will be taxed if the net value of those assets exceed the current amount set by California statue. Under current law, that amount will increase to $1,000,000 in 2006. For estates which approach or exceed this value, significant California estate tax can be saved by proper estate planning.
Cost basis is used to determine capital gains. For many homeowners, the cost basis is the price they paid for their home, plus any capital improvements that have been made. The cost basis is subtracted from the selling price to determine the capital gains. When a married couple owns an appreciated asset as community property, the surviving spouse will get a step-up in the cost basis to the fair market value at the date of death of the other spouse. In other words, if the surviving spouse has to sell the residence, he or she is unlikely to have to pay any capital gains. But if the residence is held in joint tenancy, it is more likely that some capital gains tax may be due. Federal law allows the surviving spouse a capital gains exclusion of $250,000, but for some California residents, even this amount may not be enough to prevent payment of capital gains tax when a residence is sold.
Appraising the Estate
The decedent’s estate is appraised by a probate referee, who is appointed by the State Controller to determine the fair market value of the asset. The fair market value of an estate includes mortgages and other debts. Probate referees receive a fee based on .1% of the assets that have been appraised.
If an asset is owned by two or more people as joint tenants, it will usually not be probated. These assets can often identified by the words “joint tenants,” or “in joint tenancy.” When a joint tenant dies, the other joint tenant takes 100% ownership of the asset. This occurs regardless of the provisions of the Will or Trust of the deceased joint tenant. Most often couples title their house in joint tenancy which means that when one spouse passes-away, the other spouse will own the entire home – regardless of the provisions in the decedent’s spouse’s Will. Joint tenancy is not recommended for assets that can increase in value, such as a residence, because the surviving joint tenant will not receive a “stepped up cost basis” to fair market value at the date of death of the other joint tenant.
California Probate Code provides that probate estates of less than $150,000 do not need to be probated. In some cases, the total estate may be considerably larger than $150,000, but the small estate law can still be used. The reason is that many assets are not defined as probate assets, such as life insurance (unless it was payable to the estate), IRAs, 401Ks, assets held by a living trust, and joint tenancy assets. The $150,000 amount is calculated by totaling all of the probate assets owned by the decedent.
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