California’s Proposition 40 Billionaire Tax: What Family Offices Should Watch Before the November 2026 Ballot

See the 2026 Billionaire Tax Act.

Although Proposition 40 has qualified for the ballot, it remains subject to voter approval, regulatory implementation, and likely constitutional litigation, and 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 January 1, 2026, but would measure net worth as of December 31, 2026. As drafted, an individual who was a California resident on January 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 December 31, 2026. 

Who Would Pay the California Billionaire Tax? 

The tax would apply to those individuals whose net worth is at least $1 billion on December 31, 2026. Married couples would be treated as a single individual, meaning the $1 billion threshold would apply to the couple’s combined net worth rather than separately to each spouse. The measure is estimated to apply to approximately 200 California residents. 

The tax rate reaches 5%, but the Act phases in at that rate for individuals with net worth between $1 billion and $1.1 billion. For an individual 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 is not a tax only on the excess over $1 billion; rather, it is a steep phase-in that reaches the full 5% rate at $1.1 billion, where 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 a 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 would not be controlling; the relevant nexus would run through the grantor’s California residency. 

Charitable Trusts, CRTs, and Charitable Lead 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 (IRC) § 501. Transfers to a tax-exempt trust during 2025 or 2026 would not be included in the donor’s net worth under the trust attribution rules, and such trusts would not be subject to the separate applicable trust tax. Wholly charitable trusts — such as trusts described in IRC § 501(c)(3) — would generally qualify as tax-exempt trusts. Charitable remainder trusts (CRTs) should be analyzed separately because they are generally exempt under IRC § 664 rather than IRC § 501; family offices should not 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 also present a more nuanced question. A charitable lead trust 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 charitable lead trust is typically not exempt from federal income tax under IRC § 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 does not mention CRTs, charitable lead trusts, 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

Outright gifts that are not made in trusts are addressed separately under the Act. 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 after October 15, 2025, provided the property, either alone or together with other substantially interchangeable transferred items, has a fair market value in excess of $1 million. Because a gift is by definition a transfer for less than fair market value, outright gifts exceeding $1 million made after October 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 December 31, 2026, valuation date.

Charitable giving should be evaluated against that transfer-addback rule rather than treated as an automatic year-end net-worth reduction. Completed charitable transfers made on or before October 15, 2025, may reduce assets that would otherwise be measured on the December 31, 2026, valuation date. After October 15, 2025, however, large outright charitable gifts may be added back to the donor’s net worth if they fall within Proposed Section 50303(11), and charitable pledges entered into after that date would not reduce net worth. Family offices considering accelerated charitable giving should therefore review the timing, recipient, structure, and fair market value of the transfer before assuming that the gift will reduce the Proposition 40 tax base.

Real Estate Planning Under Proposition 40

Real estate receives uneven treatment under the proposal. Real property held directly or through a revocable trust would be excluded from the threshold and tax calculation. Real property held through a limited liability company, however, would be subject to the tax. This distinction may be significant for family offices serving families that hold residential, commercial, or investment real estate through entity structures for liability, privacy, governance, or succession-planning reasons. 

Valuation Challenges for Private Businesses and Illiquid Assets

The valuation provisions are among the most consequential parts of the proposal. Although the Act starts with a traditional fair-market-value standard, it overrides that standard in several ways that may increase taxable value. Assets could not 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 could not be less than the amount for which it is insured, making insurance coverage levels a potential valuation floor. 

Private company interests would be subject to a presumptive formula: fair market value 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 risk, growth profile, illiquidity, or capital structure. 

The ownership-percentage rule may be especially important for founders or family offices holding dual-class shares or other control rights. For interests that confer voting or other control rights, the taxpayer’s ownership percentage is presumed to be at least the taxpayer’s percentage of voting or control rights. In a dual-class share structure, that presumption could attribute value based on voting control rather than economic ownership. 

Understatement Penalties and Audit Risk

The Act would permit a certified appraisal to replace the formulaic value only if the taxpayer or the Franchise Tax Board can show by clear and convincing evidence that the formula would substantially overstate or understate actual value. That relief mechanism may be difficult to rely on because the burden of proof is high, the term “substantially” is undefined, and the process could invite adversarial valuation disputes with the Franchise Tax Board. 

The penalty regime could magnify the consequences of disputed valuations. A substantial understatement would trigger a 20% penalty, while a gross understatement would trigger a 40% penalty. Because the Act’s valuation framework contains significant uncertainties, these penalties could create exposure even where a taxpayer makes a good-faith valuation that the Franchise Tax Board later disputes. 

Open Questions That Could Affect Tax Liability

Several unresolved questions are likely to matter for family offices. 

• The Act does not clearly address whether pre-2025 transfers to non-grantor trusts (1) are excluded, (2) included at 100%, or (3) included at another percentage. 

• It does not define how large a deviation must be before a formulaic valuation “substantially” overstates or understates actual value. 

• It does not clearly define the boundary between avoidance-motivated transactions and legitimate business planning. 

• It also 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 fair-market-value 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.

Trust inventories should also be updated. 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. 

Insurance coverage should be reviewed before the December 31, 2026, valuation date. Over-insured assets may carry a taxable-value floor equal to the insured amount, regardless of actual fair market value. 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.

The Litigation Outlook for Proposition 40

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 should not assume, however, that litigation will eliminate the need for preparation. If the measure passes, enforcement could proceed unless delayed by injunction, and the compliance timeline may depend on how courts and regulators respond. The prudent approach is to monitor voter developments, 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 all 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.