Inheritance, Inheritance Tax, and California Divorce — What You Need to Know

Inheritance tax questions arise frequently in California divorce proceedings, particularly in high-asset cases where one spouse has received or expects to receive a significant inheritance. Understanding the relationship between inheritance, community property, and tax obligations is essential for anyone navigating a California divorce that involves inherited assets.

What Is Inheritance Tax?

What is inheritance tax, and does it apply in California? An inheritance tax is a tax imposed on the person who inherits property — the beneficiary — based on the value of what they receive. Inheritance tax and its federal counterpart, the estate tax, are frequently confused. The federal estate tax — sometimes called the death tax — is imposed on the estate of the deceased person before distribution to heirs. What is inheritance tax as a separate state-level concept? It is a tax on the recipient. California does not have a state inheritance tax. California does not have a state estate tax. The only federal tax that may apply to large estates is the federal estate tax, which applies only to estates above the federal exemption threshold — currently over $13 million per individual as of 2024.

Inheritance Tax and California Divorce

Inheritance tax and divorce intersect in two primary ways. First, inherited assets received during a marriage are generally separate property of the spouse who received them — not subject to community property division. Second, when a spouse inherits a large sum during the marriage, the income generated by that inheritance during the marriage may be community property, depending on how the assets were managed. Understanding both of these principles is critical to protecting an inheritance in a California divorce.

Is an Inheritance Separate Property in California?

Under Family Code § 770, property acquired by a spouse during the marriage by gift, bequest, devise, or descent is the separate property of that spouse. This means an inheritance received by one spouse during the marriage — even during a long marriage — is that spouse's separate property and is not subject to division in a California divorce. The inheritance does not become community property simply because it was received during the marriage. However, inheritance can lose its separate property character through commingling — mixing the inherited funds with community funds — or transmutation — changing the character of the property through agreement or conduct.

When an Inheritance Becomes Marital Property in California

An inheritance can become community property — or subject to a community property claim — in several ways. If inherited funds are deposited into a joint account and mixed with community funds without tracing, the separate property character may be lost through commingling. If an inherited home is used as the family residence and community funds are used to make mortgage payments or improvements, the community may acquire an interest under Moore-Marsden principles. If a spouse titles inherited property in joint names with the intention to make a gift to the community, that transmutation may be effective. Protecting the separate property character of an inheritance requires careful record-keeping, maintaining separate accounts, and avoiding actions that could be construed as a gift to the community.

Income from Inheritance During Marriage

California community property law treats income from separate property as separate property. This means that dividends, rents, and other income generated by an inheritance during the marriage are also separate property of the inheriting spouse — not community property. This is a significant difference from some other community property states, which treat income from separate property as community property. In California, a spouse who inherits a stock portfolio during the marriage keeps both the portfolio and the dividends it generates as separate property, assuming the inheritance is properly maintained and not commingled.

Inheritance and Child Support in California

While an inheritance may be separate property not subject to division, it can still affect child support calculations. California's guideline child support formula is based on each parent's income. An inheritance that produces ongoing investment income — dividends, interest, rental income — may be treated as income to the receiving parent for child support calculation purposes. A one-time inheritance distribution is typically not treated as recurring income, but income it generates going forward is relevant to support calculations.

Estate Planning After California Divorce

Divorce triggers the need to review and update estate planning documents. California Probate Code § 21401 provides that a divorce or annulment revokes any disposition to a former spouse in a will or trust executed before the divorce. Beneficiary designations on IRAs and other retirement accounts that name a former spouse are also revoked by California law for accounts that are not governed by federal ERISA law. However, as discussed elsewhere, ERISA-governed plans such as 401(k)s are not subject to California's automatic revocation rule, so beneficiary designations on those plans must be updated manually. After a California divorce, every estate planning document — will, trust, power of attorney, healthcare directive — and every beneficiary designation should be reviewed and updated.

Furubotten Law, APC advises high-net-worth clients on inheritance, community property, and asset protection in divorce throughout Orange County and Riverside County. Call (714) 795-3862 for a complimentary initial case evaluation.

Is There an Inheritance Tax in California?

Is there an inheritance tax in California? No. California has neither a state inheritance tax nor a state estate tax. What are inheritance taxes in general? They are taxes imposed on recipients of inherited property — some states impose them, but California abolished its inheritance tax. What are inheritance taxes at the federal level? The federal estate tax applies to large estates above the federal exemption threshold, but it is imposed on the estate before distribution, not on individual beneficiaries who receive their shares. Inheritance received by California residents from a deceased person's estate is generally not subject to California income tax — inherited property receives a stepped-up basis to fair market value at death, eliminating capital gains tax on appreciation that occurred during the decedent's lifetime.

Is inheritance community property in California? No — inherited property received by one spouse during the marriage, even property inherited from the other spouse's relatives, is that spouse's separate property under Family Code section 770. Is inheritance community property if commingled with joint funds? Potentially — if separate property inheritance is deposited into a joint account and mixed with community funds without adequate tracing documentation, it may lose its separate property character. A contingent beneficiary is the person designated to receive retirement account or life insurance proceeds if the primary beneficiary predeceases the account owner or declines to accept the benefit. Contingent beneficiary designations in California retirement accounts and life insurance policies do not automatically update upon divorce and must be changed expressly after the divorce is final.