With respect to estate taxation of life insurance proceeds, which statement is correct for a California resident?
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Answer & full 3-part explanation (select an option above, or peek)
Why D is correct
California repealed its state estate and inheritance taxes, so no California estate or inheritance tax applies to life insurance proceeds (or any other assets) at death. However, the federal estate tax still applies where the decedent's gross estate, including life insurance proceeds over which the insured held incidents of ownership, exceeds the applicable federal exclusion amount. A California-licensed agent should present this accurately: state tax is gone, but the federal estate tax can still reach large estates, and the proceeds can be included in the estate even though they are income-tax-free.
Why the other options are wrong
- A) California has no state estate tax with a 10% rate; the state's estate and inheritance taxes were repealed years ago. No such state levy exists today. That rate is fictional.
- B) California does not piggyback the federal estate tax; it has no state estate tax at all, regardless of federal law changes. The state stands alone on this point. It has no estate tax.
- C) California cannot exempt proceeds from the federal estate tax; federal inclusion rules under IRC §2042 apply independently of any state law. Federal rules govern the estate. No state law can override them.
Memory hook
California the state: no estate tax. Uncle Sam: still watches large estates.