California vs. the IRS, Part 3: Estate Planning, HSAs, and Retirement Accounts
Part 1 covered the individual-level basics and California's new (but OBBBA-excluded) conformity date. Part 2 covered QSBS/Section 1202, Opportunity Zones, and GILTI/NCTI for founders and cross-border owners. This closing post covers estate and gift tax, HSAs, and retirement account wrinkles — areas where "California has no estate tax" gets oversimplified, and where a few longstanding conformity gaps quietly cost clients money every year.
1. Estate and gift tax — California has none, but don't stop there
Federally: OBBBA permanently raised the federal estate and gift tax exemption to $15 million per person (indexed for inflation), effective for 2026 and beyond — resolving the scheduled sunset that would have cut the prior exemption roughly in half. For married couples, portability still allows the surviving spouse to use both exemptions, effectively up to $30 million.
California: California has no state-level estate tax and no state-level gift tax. This is genuinely simple — there's no California conformity question to ask here, because there's no California estate or gift tax regime to conform.
Where it gets more complicated: "no estate tax" doesn't mean "no California tax consequences at death." Two things still matter a great deal for California clients:
Step-up in basis on inherited assets is a federal income tax concept, and California conforms to it — so appreciated stock, real estate, and business interests still get a basis step-up for California income tax purposes when inherited. This is often the more financially significant item for California families than the (nonexistent) state estate tax.
Community property. California is a community property state, and on the first spouse's death, community property assets can receive a full step-up in basis (both halves), not just the deceased spouse's half — a meaningfully better result than separate-property states get under federal law. This is a California-specific planning point worth surfacing in every married client's estate conversation, independent of the federal exemption amount.
So the estate-planning conversation for a California client isn't "do we owe California estate tax" (no) — it's "is the federal $15M exemption enough headroom, and are we positioned to capture the full community-property basis step-up." Different question, and the one that actually drives the numbers.
2. HSAs — one of California's oldest, most overlooked non-conformity items
Federally: Health Savings Account contributions are deductible, growth is tax-deferred, and qualified withdrawals are tax-free — the "triple tax advantage" that makes HSAs one of the most efficient savings vehicles in the code.
California: California is one of only two states (along with New Jersey) that does not conform to HSA tax treatment at all. For California purposes:
Contributions are not deductible — added back as California income. Earnings and growth inside the account (interest, dividends, capital gains) are taxable each year as they accrue, not tax-deferred — meaning an HSA effectively has to be tracked like a taxable brokerage account for California purposes, with its own basis and gain/loss reporting. Qualified withdrawals for medical expenses are still tax-free for California, at least — that piece does line up with federal treatment.
This is not new and has nothing to do with OBBBA — it's a longstanding, easy-to-miss gap. Clients who fund HSAs through payroll (pre-tax federally) often don't realize the contribution is added back as California income, or that they need supplemental basis tracking for the investment portion of the account. This is worth flagging every time a client opens or funds an HSA, not just at filing time.
3. Retirement accounts — mostly aligned, with a few specific gaps
The good news: California generally conforms to the core federal rules for 401(k)s, traditional and Roth IRAs, and standard contribution limits — this is one of the more conformed areas of the code, and it's not the source of major surprises for most clients.
Where it's worth double-checking rather than assuming:
SECURE 2.0 provisions rolling out over the last few years (expanded catch-up contribution rules, the Roth catch-up requirement for higher earners, automatic enrollment changes, 529-to-Roth IRA rollovers) were enacted at different times and under different federal vehicles than OBBBA — California's conformity to each piece depends on when it was enacted relative to California's own conformity date, and shouldn't be assumed uniform across all of them. Each new provision is worth a specific conformity check rather than a blanket "retirement accounts conform" assumption.
Required minimum distribution (RMD) ages and rules generally track federal for California income tax purposes, but the underlying income is still fully California-taxable in the year distributed — same treatment as federal, just worth confirming as SECURE 2.0's RMD age changes continue to phase in.
The pattern here is different from Parts 1 and 2: retirement accounts are mostly a "yes, it conforms" area, but the exceptions are scattered and provision-specific enough that each new federal retirement change deserves its own quick conformity check rather than being lumped in with the general rule.
Wrapping up the series
Across all three posts, the same discipline applies: treat every federal change — OBBBA or otherwise — as federal-only until California conformity is confirmed. Some gaps are permanent and structural (QSBS, HSAs, no state estate tax). Some are timing-driven and will likely close as California's conformity date continues to advance. And some, like GILTI/NCTI or SECURE 2.0's various pieces, need a specific, facts-based answer rather than a general rule.
If there's one habit worth building from this series, it's this: whenever a federal tax headline lands, the very next question should be "and what does California do with this?" — before it becomes a plan, and definitely before it becomes a surprise on next April's return.
