The tax debate on wealth has transitioned from a political philosophy to a practical planning issue for billionaires, founders, executives, and families with significant business stakes in California.
Proposition 40, which will be on the November 2026 ballot, would place a one-time tax on the covered assets of taxpayers and trusts over one billion dollars in value of up to 5%. The measure would apply the general rules going back to residency and asset ownership in 2026.
The worst problem for rich Californians is uncertainness. Those who have high concentrations of stock in their holdings may have issues related to the valuation of those assets and liquidity, while entrepreneurs and real estate investors will want to know which assets are included and whether restructuring their holdings before a potential tax event would be advantageous. Look for professionals (like the best tax attorney in Los Angeles) if you are facing difficult tax issues.
Why Proposition 40 Matters?
The proposed tax is targeted at the covered assets, including businesses, securities, artworks, collectibles, and intellectual property. Some retirement assets and real property have exclusions.
Importantly, there are also some aspects of the proposal that address the issue of property transferred to trusts, which will not necessarily mean that property is excluded from the wealth-tax calculation by merely being put into trusts.
That makes traditional estate-planning strategies more complicated. There is no automatic protection for wealth from a new state-level levy under an irrevocable or non-grantor trust.
Trust Structures Under the Microscope
There are several structures that high-net-worth families are looking at:
- Non-grantor trusts: These can be used to shuffle some assets out of an individual’s personal tax portfolio, but proposed rules would consider certain qualified trusts associated with a billionaire as “applicable trusts.”
- If a trust was established in California by a trust maker that is no longer a California resident, transferring the trust or trustee out of California will not remove the exposure.
- Irrevocable trusts already in place: Families should consider when the assets were assigned to the trust, how the assets were added to the trust, and if proposed lookback provisions could apply to the trust.
- Family investment entities must be carefully valued and analysed, and entity formation does not mean there is no personal exposure.
The bill makes specific provisions for non-grantor trusts that receive and hold property from an applicable individual to be considered an applicable trust, even if the trust itself does not have its main activity in California.
Who is considered to be a resident?
Residence is emerging as a major planning problem. California has traditionally not just looked at the number of days someone spends in the state. Facts such as domicile, relationship, business activity, and more may be relevant. Another proposed 2026 project aims to recalibrate the definition of residence based on aspects such as the number of days spent in California, state ID, and voter registration.
For this reason, high net-worth families looking to relocate should carefully record their facts instead of just thinking of a move as a change of address. Get in touch with a tax group (similar to tax law firms in San Diego) for some additional help.
The Following Guidelines Provide Some Practical Steps for Wealthy Families
In the lead-up to substantial changes:
- Inventory hard-to-value holdings and covered assets.
- Check out trust documents and historical asset transfers.
- Estimate the potential exposure to tax liability for a variety of valuation scenarios.
- Record residence and domiciles facts at the time.
- Meet estate, tax, and legal advisors prior to transferring large amounts of property.
- Don’t rush transactions that are focused on an uncertain offer.
If voters approve Proposition 40, it will do much to transform how California wealth is distributed. The better course of action for high-net-worth families is not to act in a panic, but thoughtfully model, document, and have a professional look at the interaction between residency, trusts, asset ownership, and valuation in the context of the final rules.
