Old-school inheritances vs. today’s reality in California
Old-school thinking says an inheritance arrives with a tax bill stapled to it. That was my grandparents’ view, and honestly, a lot of heirs still brace for it. The present reality, especially in California in 2025, is different. The big question I get this year is simple and practical: is the cash in the account taxable, or is it only the interest you earn after the money hits your name? Short answer: in the U.S., the inheritance itself usually isn’t income to you, but timing matters a lot for the interest.
Let me frame it clearly, because the federal and state layers split the job:
- Federal. The U.S. has an estate tax (on the estate, not the heir) that only applies above very high thresholds. In 2024 the federal estate tax exemption was $13.61 million per person (indexed annually); for 2025 it’s a bit higher, roughly around $14 million. Most estates never come close. Income tax is different: interest the account earned before you took ownership can be taxable to the estate or to you via a K-1 if it’s distributed. Interest you earn after you own it is your taxable interest income and you’ll see it on a 1099-INT.
- California. California still has no state inheritance tax and no state estate tax in 2025. You won’t owe a California tax just for inheriting. But California will tax the interest you earn after you receive the funds as regular income (of course it will).
A couple data points to calibrate expectations: as of 2024, 12 states plus D.C. had an estate tax and 6 states had an inheritance tax (Maryland has both). California isn’t on either list. Meanwhile, bank yields matter: earlier this year, high-yield savings and short CDs were printing around 5% APY, and here in Q4 I’m still seeing ~4.5% on reputable platforms. That’s great for savers, but it also means the interest line on your tax return can be non-trivial.
The practical wrinkle most heirs miss is the clock. If Mom’s account earned interest up to her date of death, that pre-death interest belongs to the estate’s return. Interest the account earns while the estate is being settled (say it takes a few months, probate timelines are messy) may be reported to you via a Schedule K-1 if distributed. Once the funds move to your account, the meter resets and any new interest is yours and taxable to you. Simple idea, annoying paperwork. I’ve seen executors spend more time chasing 1099s than anything else.
So if you’re searching “are-inherited-bank-funds-taxable-in-california,” here’s what you’ll learn in this section and next: we’ll separate the old myth from the present rules, show how federal estate tax and federal/state income tax interact, and pin down the timing, before vs. after you take ownership, because that’s where the tax actually lands (and where people, understandably, get tripped up).
Is the inherited cash taxable income? What California and the IRS actually say
Short answer first: cash you inherit is not taxable income. Not to the IRS, not to California. You can deposit the check and you won’t put that amount on your Form 1040 as “wages” or “interest” or anything like that. That’s the baseline a lot of people miss because the words sound similar, estate tax, inheritance tax, income tax, and the mail you get during probate looks like alphabet soup.
Here’s how the pieces actually fit together. At the federal level, we have an estate tax, which is assessed on the estate itself if the estate is large enough. If it’s triggered, the executor files Form 706 and the estate pays the tax before you see a dollar. This is separate from your personal income tax. You, as beneficiary, do not report the inherited principal as income. California, for its part, currently has no inheritance tax (0%) and no state estate tax (0%) under current law. So there’s no California tax on receiving the money. I know, simple sentence, big relief.
Circling back to a thing I said earlier about interest because this is where people get tripped up: the principal you inherit isn’t taxable to you, but earnings can be. Pre-death income belongs on the decedent’s final return or the estate’s Form 1041. Income earned by the estate while it’s being administered can show up on a Schedule K-1 to you if distributed. Once the money is in your account, any new bank interest is your income going forward. And with deposit rates still relatively elevated this year compared with pre-2022, even a short stay in a money market can produce a 1099 that you’ll need to reconcile. Annoying, yes. But it’s just reporting, not tax on the inheritance itself.
Two more planning notes that matter this year and next:
- Federal exclusion is calendar-year based. The estate tax exclusion amount resets by year. Under current law, parts of the 2017 tax law are scheduled to sunset in 2026, which would shrink the exclusion. I’m not guessing numbers here, point is, families with large estates are talking to counsel now, because the window is time-based.
- Gifts before death are a separate regime. Lifetime gifts aren’t income to the recipient either, but the donor may need to file Form 709 (federal gift tax return). Filing can be required even when no gift tax is due, depending on the year and amounts. The recipient doesn’t pay tax for receiving a gift.
Quick California check because that’s the headline people Google, “are-inherited-bank-funds-taxable-in-california?”, the state’s answer is still no on inheritance tax and no on a state estate tax. Your California income tax only cares about income you earn after you own the funds (like bank interest, dividends if you invest it, etc.).
Bottom line: inherited cash itself isn’t taxable income. Estate tax, if any, is an estate-level issue handled by the executor, and California doesn’t tack on its own inheritance or estate tax. The only thing that becomes your taxable income is what the money earns after it’s yours.
And just to over-explain one more time because I’ve watched executors burn Saturdays on this, inheritance (principal) is non-taxable to you; earnings are taxable depending on when they were earned; 2026 brings a smaller federal estate exclusion under current law, which is a planning clock, not an income-tax surprise.
When the 1099-INT lands: who reports interest before and after you inherit
Here’s the clean split that actually works in the real world: interest the account earns through the date of death belongs to the decedent’s tax life, and interest earned after you legally own it belongs to you. I know, sounds obvious, but banks and timelines get messy, probate, retitling, EINs, all of it. So let me spell it out the way I tell executors who email me on Sunday nights.
- Through date of death: That interest is reportable on the decedent’s final Form 1040 or, if the estate/trust is opened and receives it, on the fiduciary return (Form 1041). The executor decides where it lands based on who actually received the income and when the estate was set up.
- After you’re the owner: That interest is yours. You’ll get a Form 1099-INT from the bank under your name/TIN and report it on your federal return. California treats plain bank interest the same way, taxable as ordinary income, so it goes on your CA return too.
Quick fact that saves arguments: banks issue a 1099-INT when total interest is $10 or more for the year (IRS threshold). If it’s under $10, they might not report, but yes, you still owe tax on it. I know, it’s annoying.
Where it gets sticky is the in-between months while assets sit in limbo. If the estate or a revocable trust (that’s become irrevocable) holds the account for a while in 2025, the estate/trust is the taxpayer for that period. The bank should put the account under the estate/trust EIN, issue the 1099-INT to that entity, and the fiduciary files Form 1041. If the fiduciary distributes the income out to beneficiaries, you may receive a Schedule K-1 (Form 1041) showing your share of interest to pick up on your 1040. If they retain it, the tax gets paid at the estate/trust level, often at higher brackets.
I’m going to circle back, because timing matters more this year. Savings yields are still elevated by recent standards, many high-yield accounts have paid roughly 4-5% APY in 2025, so a few months parked in an estate account can throw a meaningful chunk of interest onto the fiduciary return instead of yours. Not always bad, just different brackets, different results. My take: if administration is going to drag out, consider periodic distributions of DNI to keep the tax where you want it (okay, I used jargon, DNI just means the trust’s distributable net income the K-1 passes through).
California conformity, where it matters: California aligns with federal timing for interest, whoever is the owner during the period reports it. Regular bank interest is taxable for California and federal. Two footnotes people forget: (1) U.S. Treasury interest is exempt for California, even though it’s taxable federally; and (2) bank interest is fully taxable in California, no special break. So if the estate holds a T-bill ladder, some of that may drop off the CA return, but a savings account at a bank? Taxable at both levels.
TIN/name changes: Get the titling right. As soon as the bank is notified of death, the account should move to the estate/trust with an EIN, or to you with your SSN once you legally own it. Hand them the death certificate and a Form W-9 as needed. If the bank leaves the estate’s EIN on the account after distributions, the 1099-INT can get misreported under the estate, cue amended returns and a lot of hold music.
Rule of thumb: final 1040 or 1041 gets pre-death interest; your 1040 gets interest after you own it. If an estate/trust holds the cash for months, expect a 1041 and possibly a K-1. And yes, California taxes bank interest the same as federal, no inheritance tax hiding in the fine print.
One last bit I almost skipped: high-rate environments shift dollars, not just decimals. The longer funds sit in the estate/trust at 4-5% APY, the more interest migrates to the fiduciary return, and those brackets escalate fast. Worth planning, even if it’s just a calendar reminder to push retitling sooner.
POD designations, living trusts, and probate: why mechanics change the tax picture
Titles decide the tax timeline. The cash you inherit isn’t taxable income in California, but the interest after death is, and who reports it depends on how the account is titled the moment the owner dies, and whether anyone moves quickly to update paperwork. California has no inheritance tax and no separate estate tax, so we’re just talking plain income tax here, same as federal for interest.
POD/beneficiary accounts are the cleanest. With a death certificate and your W‑9, banks usually flip ownership pretty fast, days or a couple weeks in my experience, so future interest hits your 1099‑INT under your SSN. If the bank accrues interest between date of death (DOD) and the retitle date under the decedent’s SSN, ask them to split-report or give you a DOD-to-retitle interest figure; if they can’t, you can still allocate manually. Remember, 1099‑INTs generally issue when interest is $10 or more for the year, which means even small balances can trigger a slip. Keep copies of the DOD balance and the retitle confirmation, because that’s your line in the sand for who reports what.
Revocable living trusts usually avoid probate in California, so banks move from the grantor’s SSN to the trust’s new EIN after death (the trust becomes irrevocable). While the trust holds funds, interest is reported on a Form 1041. If the trustee distributes cash the same year, that interest can be pushed to beneficiaries on a Schedule K‑1 (DNI mechanics). Here’s why speed matters in 2025’s still-decent rate world, online savings are hanging around the mid‑4% APY range as we head into Q4, more months parked in the trust means more income potentially taxed at compressed fiduciary brackets. For reference, in 2024 the 37% bracket for estates and trusts started at $14,450 of taxable income; 2025 is a bit higher after inflation, but the point stands: it doesn’t take much interest to climb those brackets.
Probate estates are the slow lane. California probates commonly run several months; 9-12 months is not unusual, and complex cases go longer. During that period, the estate’s EIN sits on the account, the estate files Form 1041, and it reports the interest. Once the court-authorized distribution happens and the account is retitled or closed, new interest shifts to you. The fees in probate are statutory and can be hefty, but from a tax angle the bigger issue is time, every extra month at 4-5% APY keeps income on the fiduciary return instead of your 1040.
Operational checklist I actually use with clients (and with my own family, frankly):
- Capture the DOD balance in writing (bank letter or statement). That’s your cut-off for pre- vs. post-inheritance interest.
- Retitle fast: for POD, give the W‑9 the same day you hand over the death cert. For trusts/estates, get the EIN first, then update the bank.
- Ask for split 1099‑INTs if the payee name/ID changes midyear; if not possible, keep your own allocation worksheet.
- Expect a 1041/K‑1 when a trust or estate holds cash for months; don’t be surprised if the K‑1 shows only part-year interest.
Simple rule: POD usually means the heir reports post‑DOD interest quickly; trusts and estates report interest while they hold the cash; once you legally own it, it’s back on your 1040. Same rules for California, no inheritance tax lurking.
One last practical note: if a bank leaves the estate or trust EIN on an account after you’ve received your distribution (it happens), you can end up with a 1099‑INT to the wrong taxpayer. Fix it early, call the bank, update titling, and document the date. Saves you the amended-return headache and, yes, the hold music.
Edge cases that trip people up: foreign accounts, big cash, and Medi-Cal recovery
Edge cases that trip people up: foreign accounts, big cash, and Medi‑Cal recovery
A few non-obvious traps pop up with inherited bank money, most of them are reporting problems, not taxes. The line matters. The IRS cares both about what you owe and what you have to tell them about, and those aren’t the same thing.
Inherited foreign bank accounts. The day you legally own a foreign account, two separate U.S. reporting regimes might kick in:
- FBAR (FinCEN 114): File if your aggregate foreign financial accounts exceeded $10,000 at any time during the calendar year. Due April 15 with an automatic extension to Oct 15. This is a filing obligation, not a tax. Even if the account earned zero interest, you still file if you cross the threshold.
- FATCA (Form 8938): Thresholds depend on filing status and where you live. For U.S. residents, it’s generally $50,000 at year-end or $75,000 anytime for single filers, and $100,000/$150,000 for married filing jointly. Higher if you live abroad. Again, filing obligation, not a tax.
Penalty reality check, this is where it stings. FBAR penalties can be brutal if willful, and Form 8938 has its own $10,000+ penalty structure. Also, large foreign inheritances or gifts from a non‑U.S. person can trigger Form 3520 if the total exceeds $100,000 in a year. It’s informational. I think the 3520 late penalty is 5% per month up to 25%, don’t quote me… actually yes, that’s in IRC 6039F. Point is: file the form, avoid the headache.
Big cash deposits at U.S. banks. Cash is different. If you walk in with a big envelope, the bank has to follow anti‑money‑laundering rules. Deposits of $10,000+ in currency trigger bank reports (the bank files a Currency Transaction Report). Form 8300 is what businesses file when they receive >$10,000 in cash in a trade or business, banks have their own reporting system. Not a tax. But in 2025, banks are pretty strict on AML reviews and source‑of‑funds questions, so expect a few calls if you make repeated near‑$10k deposits. Wires and ACH? Not “cash.”
No federal form for a domestic inheritance. If you inherit funds from a U.S. decedent and it lands in your account, there’s no stand‑alone federal form just for receiving it. Your job is to report the interest you earn after you own it. That’s it. The exceptions are those foreign account and foreign gift filings above. Timing matters, earlier this year I saw someone skip an FBAR because the account closed in March; still required, because they owned it and it briefly crossed the threshold.
Medi‑Cal estate recovery in California. This is not an income tax, it’s a claim against certain probate estates when the decedent received Medi‑Cal benefits. Since 2017, California limits recovery to the probate estate (not non‑probate assets like many TOD/POD accounts), and to services received after age 55 or for those permanently institutionalized. Translation: if the decedent’s assets avoid probate, revocable trust properly funded, POD/TOD set up, there may be no estate to recover against. But if the estate goes through probate, the Department of Health Care Services can make a claim before heirs see the cash. Separate lane from taxes. Different agency, different rules.
Quick human note, I’ve sat across from plenty of heirs who swear they “did everything right” and still got a scary letter. Happens. Keep a simple checklist: FBAR/FATCA once you own a foreign account, 3520 for big foreign gifts, expect AML questions on cash, and remember Medi‑Cal recovery rides on probate status. If you’re unsure, ask the bank for year‑end balances in writing and screenshot the closing confirmations, yea, boring, but it saves you later.
Keep the lanes clean: tax vs. reporting vs. recovery. Inheritances aren’t taxable income federally or in California, but you still might have to report foreign accounts, explain cash to your bank, and address recovery if probate is involved.
Put a bow on it: what to do now (and the 2026 wildcard)
Bottom line, and I know this was the original question rattling around: the cash itself isn’t income in California or federally. The interest is. California has no inheritance tax, zero, hasn’t since the old state death tax credit went away in 2005, and there’s no separate California estate tax as of 2025. So the work from here is mostly paperwork and timing, not paying a “California inheritance tax,” because there isn’t one.
So what do you actually do this week, not someday? A few clean steps I give clients, and frankly I use the same checklist for family when they call me on a Sunday:
- Get the 1099-INT lined up under your SSN. Ask the bank to switch title and the TIN to your Social Security number as soon as you’re legally the owner. Banks issue Form 1099-INT when interest is $10 or more for the year. If the estate kept the account through September and you got it in October, you don’t want a full-year 1099 under your name. Split reporting avoids that headache.
- Coordinate with the executor on the pre-distribution period. Interest earned before you take legal title typically belongs on the estate/trust return (Form 1041) and flows to you via a Schedule K-1 if distributed. One email now saves a messy amended return later. Ask: which dates does the 1041 cover, and will beneficiaries get K-1s for interest/dividends?
- If there’s any foreign account angle, check thresholds early. The FBAR (FinCEN 114) kicks in when your aggregate foreign account balance exceeds $10,000 at any time during the year, one day counts. FATCA Form 8938 adds on top: for most U.S.-based single filers, it’s $50,000 at year-end or $75,000 at any point ($100,000/$150,000 if married filing jointly). Expats have higher thresholds. Missed filings get expensive; don’t guess.
- Document the handoff. Grab year-end balance letters, closing statements, and a screenshot of the TIN change. I know, it’s tedious. But when a 1099 looks off next February, having the dates saves you from playing detective.
Quick reality check on interest right now. As we sit here in Q4 2025, many high-yield savings accounts are still paying roughly 4% to 5% APY, depending on the bank and promos. That’s real money on a six-figure balance, and yes, every dollar of interest is taxable at ordinary rates. Not trying to scare you, just saying don’t sleep on the 1099 mechanics when rates aren’t near-zero anymore.
Now the 2026 wildcard. Under current law, the temporarily doubled federal estate and gift tax exclusion sunsets on January 1, 2026. Translation: the exemption is expected to drop by about half, from the 2024 level of $13.61 million per person to something in the roughly $6-7 million range per person in 2026 (exact number depends on inflation adjustments). If your family’s plan was drafted years ago, credit shelter trusts, old A/B plans, outdated beneficiary designations, it might still “work,” but it might not be optimized. And yes, the IRS finalized “anti‑clawback” regs in 2019, so amounts you used under the higher exemption aren’t clawed back later, which is good. But new gifts or deaths after the sunset face the lower number.
What should you do? Two things:
- Talk to an estate attorney/CPA this year about whether lifetime gifts, disclaimers, or a portability filing (Form 706) make sense. Even if you’re “just” inheriting cash, beneficiary designations, TOD accounts, and titling should line up with a 2026 world.
- Keep the lanes clean: no California inheritance tax, but do report interest correctly; switch the TIN promptly; align with the executor on 1041/K‑1s; and if foreign accounts are in the mix, hit FBAR/FATCA on time. That’s the playbook.
Could I be oversimplifying a hair? Sure. Families, timelines, and banks don’t always cooperate. But if you do the TIN swap now, match the interest periods, and calendar a pre-2026 estate review, you’re 90% of the way there. And if something feels off, ask. I’ve wrestled with the same questions at my own kitchen table.
Frequently Asked Questions
Q: Should I worry about California taxes on an inherited bank account?
A: Short version: no California inheritance or estate tax in 2025, so the lump-sum you inherit isn’t taxed by the state. But yes, California taxes the interest you earn after the money is in your name as regular income. Federally, same idea: the inheritance itself isn’t income, but interest is. Interest earned before you took ownership may hit the estate/trust return or flow to you on a Schedule K-1; interest after you own it shows up on your 1099-INT. Keep the paperwork straight and you’re fine.
Q: What’s the difference between interest earned before I inherit the account and after I take ownership?
A: Timing. Per the article, interest before you’re the owner generally belongs to the estate/trust and is reported there (or passed to you on a K-1 if distributed). Once the account is retitled to you, every dollar of interest is yours to report, California taxes it, and the bank will send you a 1099-INT. With yields still around ~4.5% here in Q4 2025 on high-yield accounts, a few months of drift before retitling can create annoying tax split issues. Faster retitling = cleaner reporting.
Q: How do I handle the paperwork, 1099s, K-1s, and timing, so I don’t mess up my 2025 return?
A: Do three things: (1) Ask the executor for a date-of-death balance and a statement cut at the retitle date. That cleanly separates estate-period interest from your period. (2) Confirm if you’ll receive a Schedule K-1 for any estate/trust income allocated to you; don’t file until you have it. (3) When you see your 1099-INT, make sure the amounts align with post-retitle interest only. If interest is sizable and you’re light on withholding, consider a Q4 estimated tax payment by Jan 15, 2026 to avoid penalties. Safe harbor still applies, pay in at least 100% of your 2024 total tax (110% if your 2024 AGI was over $150k) or 90% of 2025’s tax. I see this trip people up every year.
Q: Is it better to park the inheritance in one bank or spread it out?
A: For safety and sleep, consider FDIC coverage first: it’s $250,000 per depositor, per bank, per ownership category. If you land well above that, spread funds across multiple insured banks or use different ownership categories (individual, joint, revocable trust) to extend coverage. Then improve yield: ladder 3-12 month CDs if you won’t need the cash, and keep a liquidity bucket in a high-yield savings. With rates still decent this year, I often split: 3-6 months expenses in savings, the rest in short CDs. And yep, interest anywhere you park it will be taxable.
@article{are-inherited-bank-funds-taxable-in-california-2025,
title = {Are Inherited Bank Funds Taxable in California (2025)?},
author = {Beeri Sparks},
year = {2025},
journal = {Bankpointe},
url = {https://bankpointe.com/articles/inherited-bank-funds-california-tax/}
} 