California Billionaire Tax Qualifies for November Ballot
California family offices with clients at or near the $1 billion net worth threshold should be monitoring Proposition 40, the 2026 Billionaire Tax Act, which has qualified for the Nov. 3 ballot and could impose a one-time tax of up to 5% on the net worth of certain California residents if approved by voters.
Although Proposition 40 has qualified for the ballot, it remains subject to voter approval, regulatory implementation and likely constitutional litigation. Its structure creates planning issues that family offices may need to evaluate well before any tax is due.
For family offices, the measure’s most important feature is its timing. The act would determine California residency as of Jan. 1, 2026, but would measure net worth as of Dec. 31, 2026. As drafted, an individual who was a California resident on Jan. 1, 2026, could remain subject to the tax even if the individual later relocates, so long as the individual’s net worth equals or exceeds $1 billion on Dec. 31, 2026.
Who Pays the Tax?
The tax would apply to individuals with a net worth of at least $1 billion on Dec. 31, 2026. Married couples would be treated as a single entity, meaning the $1 billion threshold would apply to the couple’s combined net worth rather than to each spouse separately.
The tax rate reaches 5%, but the act phases in at that rate for individuals with a net worth between $1 billion and $1.1 billion. For an individual with a net worth below $1.1 billion, the 5% rate is reduced by 0.1% point, but not below zero, for each $2 million by which the individual’s net worth falls below $1.1 billion. The result isn’t a tax only on the excess over $1 billion; rather, it’s a steep phase-in that reaches the full 5% rate at $1.1 billion, when the tax would apply to the individual’s entire net worth. This preserves a sharp “cliff” effect: relatively small valuation changes within the phase-in band can produce disproportionately large tax consequences, and at $1.1 billion, the liability would be approximately $55 million.
How Trusts Could Expand Wealth Tax Exposure
Trust ownership would require particular attention. An individual’s net worth would include the full value of any grantor trust, including trusts treated as grantor trusts for income tax purposes and trusts whose assets would be included in the grantor’s gross estate for federal transfer tax purposes. That definition could capture many irrevocable trusts, including intentionally defective grantor trusts, that families may not have expected to be included in the personal wealth tax base.
Non-grantor trusts raise additional complexity. For threshold purposes, the act would include property held by certain non-grantor, non-exempt trusts to which the individual transferred property, including 100% of property transferred in 2026 and 75% of property transferred in 2025. The act is ambiguous as to how transfers made before 2025 would be treated, and that ambiguity could materially affect whether certain individuals cross the $1 billion threshold.
The act would also impose a separate tax on certain “applicable trusts,” defined as non-grantor, non-tax-exempt trusts to which an applicable individual or related person has transferred property. The trust would be independently subject to the 5% tax on its entire net worth, with no separate $1 billion threshold. The trustee would generally be responsible for payment unless the grantor elects to consolidate the trust into the individual’s personal net worth. The trust’s own residency or situs wouldn’t be controlling; the relevant nexus would run through the grantor’s California residency.
Charitable Trusts
The trust attribution and applicable trust rules both carve out “tax-exempt trusts,” which the act defines by reference to trusts exempt from federal income tax under Internal Revenue Code Section 501. Transfers to a tax-exempt trust during 2025 or 2026 wouldn’t be included in the donor’s net worth under the trust attribution rules, and such trusts wouldn’t be subject to the separate applicable trust tax. Wholly charitable trusts, such as trusts described in IRC Section 501(c)(3), would generally qualify as tax-exempt trusts. Charitable remainder trusts (CRTs) should be analyzed separately because they’re generally exempt under IRC Section 664 rather than Section 501. Family offices shouldn’t assume that a CRT falls within the act’s tax-exempt trust exclusion absent further guidance or a separate basis for exclusion. Charitable lead trusts (CLTs) also present a more nuanced question. A CLT structured as a grantor trust would be excluded from the trust attribution and applicable trust rules under the grantor trust exception, but its assets would still be included in the grantor’s net worth through the grantor trust inclusion rule. A non-grantor CLT typically isn’t exempt from federal income tax under Section 501 and would therefore likely be subject to the trust attribution rules and could be treated as an applicable trust, potentially exposing it to the separate 5% tax on its own net worth. The act doesn’t mention CRTs, CLTs or other split-interest charitable vehicles by name, and this ambiguity may require careful analysis for families with existing or contemplated charitable trust structures.
Gift Planning and Transfer Addback Rules
The act separately addresses outright gifts that aren’t made in trusts. Proposed Section 50303(11) provides that a taxpayer’s net worth shall include the value of any property the individual transferred, other than property transferred to a trust, for less than fair market value (FMV) after Oct. 15, 2025, provided the property, either alone or together with other substantially interchangeable transferred items, has a FMV in excess of $1 million. Because a gift is, by definition, a transfer for less than FMV, outright gifts exceeding $1 million made after Oct. 15, 2025, whether in 2025 or 2026, would be added back to the donor’s net worth for purposes of the tax. This addback could be particularly significant for individuals near the $1 billion or $1.1 billion thresholds, as it effectively prevents a taxpayer from reducing net worth by giving away assets before the Dec. 31, 2026, valuation date.
Valuation Challenges for Private Businesses and Illiquid Assets
The valuation provisions are among the act’s most consequential parts. Although the act starts with a traditional FMV standard, it overrides it in several ways that may increase the taxable value. Assets couldn’t be valued at distressed or forced-sale prices, even if the tax liability itself creates liquidity pressure. Minority interest and marketability discounts would be disallowed, requiring partial interests to be valued at a pro rata share of the entire asset. Features designed to suppress appraised value, such as transfer restrictions or shareholder rights plans, could be disregarded. An asset’s value also couldn’t be less than the amount for which it’s insured, making insurance coverage levels a potential valuation floor.
Private company interests would be subject to a presumptive formula: FMV equals book value plus 7.5 times average annual book profits, multiplied by the taxpayer’s ownership percentage. For founders and family-controlled enterprises, this formula may not reflect industry-specific risks, growth profiles, illiquidity or capital structures.
Open Questions That Could Affect Tax Liability
Several unresolved questions are likely to matter for family offices.
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The act doesn’t clearly address whether pre-2025 transfers to non-grantor trusts are: (1) excluded; (2) included at 100%; or (3) included at another percentage.
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It doesn’t define how large a deviation must be before a formulaic valuation “substantially” overstates or understates actual value.
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It doesn’t clearly define the boundary between avoidance-motivated transactions and legitimate business planning.
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It leaves open how trust attribution for threshold purposes interacts with the separate tax on applicable trusts. Trustees may face uncertainty because applicable trust status can depend on facts outside the trustee’s knowledge, including a grantor’s California residency and net worth.
The act is also largely silent on the valuation of many complex or illiquid assets often administered by family offices. These may include carried interests, restricted stock, unvested equity compensation, cryptocurrency, art, collectibles and contingent interests. The general FMV standard would apply, but the absence of more specific rules could lead to disputes over methodology.
Planning Considerations Before November 2026
As the election approaches, family offices may wish to begin with a threshold analysis. That analysis should model net worth under the act’s valuation rules, not merely under conventional financial-statement or estate-planning assumptions. Families near the $1 billion and $1.1 billion thresholds should pay special attention to the sharp phase-in effect, because relatively small valuation changes could produce disproportionately large tax consequences.
Families should also update trust inventories. A useful review would identify grantor trusts, non-grantor trusts, year of funding, grantor residency facts, related-person transfers, trustee knowledge and whether consolidation may be available or desirable. Because some trust rules are ambiguous, the factual record surrounding funding dates, transfer history and trust status may become important if the act is enacted and challenged.
Family offices should review insurance coverage before the Dec. 31, 2026, valuation date. Over-insured assets may carry a taxable-value floor equal to the insured amount, regardless of actual FMV. Reducing coverage solely for tax reasons, however, may create other risks, including fiduciary concerns, lender requirements and coverage gaps.
Liquidity planning may be equally important. The phase-in formula for individuals between $1 billion and $1.1 billion, and the full 5% tax on total net worth at $1.1 billion and above, could create a liability that materially exceeds available liquid assets. Family offices should evaluate potential funding sources, borrowing capacity, asset-sale timing and the risk that forced sales may not be recognized for valuation purposes.
Litigation Outlook
The act would almost certainly face legal challenges if enacted. Potential challenges may include claims under the dormant Commerce Clause, due process principles, the Bill of Attainder doctrine, equal protection principles and California constitutional limits on ad valorem taxes on intangible personal property.
Family offices shouldn’t assume, however, that litigation will eliminate the need for preparation. If the measure passes, enforcement could proceed unless delayed by an injunction, and the compliance timeline may depend on how courts and regulators respond. The prudent approach is to monitor developments among voters, potential pre-election challenges, and any post-enactment guidance while preparing as though the measure could become enforceable.
Proposition 40 remains uncertain because voter approval, the interaction with other ballot measures, implementation and litigation remain unresolved, but its potential impact is significant for ultra-high-net-worth families, founders, trustees and family offices. Even before the election, families near the threshold should consider a coordinated review of net worth, trust structures, private company valuation, insurance coverage, real estate ownership and liquidity planning.
