California's Proposed Billionaire Tax: What You Need to Know

California voters will decide on November 3, 2026, whether to approve California Proposition 40, the 2026 Billionaire Tax Act (the Act). If enacted, the measure would impose a one-time tax of up to 5 percent on the net worth of certain California-resident individuals and applicable trusts.

This Holland & Knight alert summarizes the proposed tax, including its valuation dates, net worth requirements, trust rules, charitable transfer considerations and valuation issues.

How the Tax Works

Proposition 40 would impose a one-time excise tax of up to 5 percent on an "applicable individual's" worldwide net worth. California residency would be determined as of January 1, 2026, while net worth would be measured as of December 31, 2026. Under the Act as drafted, a person who was a California resident on January 1, 2026, would remain within the Act's scope even if the person later fully left the state and established residence elsewhere.

The proposed tax rate reaches 5 percent for a net worth of $1.1 billion or more. For those worth between $1 billion and $1.1 billion, the rate is reduced by 0.1 percentage point for each $2 million by which net worth falls below $1.1 billion, subject to a zero floor. The Act treats a taxpayer and their spouse as one individual and includes the spouse's worldwide assets, regardless of the spouse's residence.

The tax would be due April 15, 2027, which could raise significant liquidity concerns. A taxpayer may elect five annual installments, but each later installment would include a 7.5 percent annual deferral charge on the remaining unpaid balance. The Act generally uses a 100 percent California apportionment default; alternative apportionment requires clear and convincing evidence and ordinarily cannot reduce the taxable percentage below 25 percent. Thus, wealth would not have to be earned in California or currently held in California to be subject to the tax.

Net Worth Calculation

Net worth is the total worldwide value, as of December 31, 2026, of all assets and property interests of the taxpayer and the taxpayer's spouse, reduced by permitted debts and liabilities. The spouse's residence does not affect inclusion. Assets exceeding $50,000 held by a claimed dependent are deemed to be the taxpayer's assets.

Recourse liabilities generally reduce net worth dollar-for-dollar when the taxpayer has no limitation on personal liability. Nonrecourse liabilities reduce net worth only to the extent the amounts included in net worth serve as collateral. A liability does not reduce net worth if it is owed to a "related person" under Internal Revenue Code (IRC) Sections 267 or 318, is contingent on a future event substantially uncertain to occur or substantially uncertain to occur within five years, was not negotiated at arm's length or does not bear market-rate interest. The Act does not define "market rates of interest."

Exempt assets include qualified pensions and individual retirement accounts (IRAs), Roth IRAs up to $10 million in present value and nonqualified deferred compensation, subject to specified exclusions. Excluded assets include real property held directly or through a revocable trust, tangible personal property located outside California for at least 270 days in 2026 (unless the relocation was substantially orchestrated to avoid tax) and up to $5 million of all other assets. These categories make the classification and documentation of ownership important.

Treatment of Trusts

The trust rules are complex and, in several respects, unclear – a detailed discussion is beyond the scope of this alert. Grantor-trust treatment is broad. Assets in any grantor trust are included in the grantor's net worth, including trusts treated as grantor trusts for income-tax purposes and trusts whose assets would be included in the grantor's federal gross estate. The rule could potentially sweep in certain irrevocable trusts.

A non-grantor, non-tax-exempt trust is an "applicable trust" if a living applicable individual with net worth of at least $1 billion (or a related person) has transferred property to the trust. An applicable trust is independently subject to the 5 percent tax on its entire net worth; it has no separate $1 billion threshold. The trustee generally is responsible for payment, unless the grantor elects to consolidate the trust with the grantor's tax computation.

The trust's own residency or situs is not controlling. The relevant nexus can arise through the California residency of the grantor. For purposes of determining whether an individual exceeds the $1 billion threshold, the Act includes 100 percent of property transferred to non-grantor trusts in 2026 and 75 percent of property transferred in 2025. The Act is ambiguous regarding transfers made before 2025.

Beneficiary Deemed Ownership

A trust beneficiary, regardless of the trust's residence, is deemed to own trust assets to the extent those assets are distributable to the beneficiary. However, a beneficiary is not deemed to own assets of an applicable trust because the trust is already subject to the separate trust-level tax. Trust agreement language, distribution standards and the actual distribution rights are key to any related analysis.

Charitable Trusts

The attribution and applicable-trust rules carve out "tax-exempt trusts," defined by reference to trusts exempt from federal income tax under IRC Section 501. A wholly charitable trust described in IRC Section 501(c)(3) would generally qualify. Charitable remainder trusts (CRTs) require separate analysis: They generally are exempt under IRC Section 664 rather than Section 501, and the Act does not state that they fall within the tax-exempt-trust exclusion.

A grantor charitable lead trust (CLT) would be outside the trust-attribution 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 is not exempt under Section 501 and could be treated as an applicable trust, potentially exposing the trust to the separate 5 percent tax on its own net worth. The Act does not mention CRTs, CLTs or other split-interest charitable vehicles by name.

Gifts and Transfer Addback Rules

Proposed Section 50303(11) provides that net worth includes the value of property transferred – other than property transferred to a trust – for less than fair market value after October 15, 2025, if the property, alone or together with other substantially interchangeable transferred property, has a fair market value exceeding $1 million. Because an outright gift is a transfer for less than fair market value, an outright gift exceeding $1 million made after October 15, 2025, whether in 2025 or 2026, would be added back to the donor's net worth.

The addback rule effectively prevents a donor from reducing the December 31, 2026, tax base by giving away assets after the stated date.

Charitable Contributions and Pledges

Charitable and philanthropic pledges made after October 15, 2025, cannot reduce net worth. A pledge made before that date reduces net worth only if it is legally enforceable by the recipient organization. In addition, a charitable donation by an applicable individual after October 15, 2025, may be included in net worth under the transfer addback rule.

Trust distributions to charitable organizations after October 15, 2025, may reduce a trust's net worth if permitted by the trust terms. Completed charitable transfers made on or before October 15, 2025, may reduce assets that otherwise would be measured on December 31, 2026. Accordingly, the timing and legal character of a contribution matter. There may be dispute over whether California could impose tax on amounts irrevocably transferred to bona fide charitable organizations.

Valuation Challenges

Publicly traded securities would generally be valued at market trading value, with no blockage discount provided. Private business interests would be valued under a statutory formula: (book value + 7.5 × average annual book profits) × ownership percentage. The formula does not provide for conventional valuation discounts and does not recognize fractional-interest discounts.

The Act also provides that ownership is presumed to be no less than the taxpayer's percentage of voting or control rights. That presumption can lead to taxing control rights above economic ownership, especially in dual-class structures. These issues may arise for founders and controlling shareholders.

Understatement penalties are substantial: 20 percent for an understatement exceeding $1 million or 20 percent of tax due and 40 percent for more significant understatements. Appraisers may face penalties equal to 2 percent to 4 percent of the understatement. Taxpayers should expect valuation support, appraisals and contemporaneous records to be central to compliance and dispute posture. Valuation firms may also need to build additional protections into their standard processes, which could increase client costs.

Constitutional and Legal Vulnerabilities

The Act anticipates litigation and permits a prepayment challenge within 60 days after enactment, with expedited direct review by the California Supreme Court. Potential challenges include retroactivity and due process, because residency is fixed before enactment and before the tax is known; characterization as a property tax despite the Act's designation as an excise tax; the federal right to travel; and Commerce Clause limits on a tax calculated on worldwide net worth. The 100 percent apportionment default and limited alternative-apportionment relief may heighten the constitutional analysis.

Political Landscape

California Gov. Gavin Newsom opposes the initiative. Opposition groups have raised significant funds and polling is divided.

Two competing ballot measures sponsored by opponents of Proposition 40 have also qualified for the November 2026 ballot: Proposition 41 and Proposition 42. Both contain competing-measure provisions stating that if either receives more votes than Proposition 40, the billionaire tax would be rendered null and void in its entirety.

Competing Ballot Measures

Proposition 41, referred to as the Transparency Act, would require pre-election audits for ballot initiatives proposing special taxes once proponents report collecting 25 percent of required signatures. The audit results would be included in the voter information pamphlet. Additionally, Proposition 41 would require any state law or ballot initiative enacted after January 1, 2026, that levies a new special tax to undergo state audits every four years to evaluate program effectiveness and identify cost-saving measures. Critically, it would also prohibit the state from enforcing any tax that is exempted or excluded from the state spending limit if enacted on or after January 1, 2026.

Proposition 42, the Retirement and Personal Savings Protection Act, would amend the California Constitution to prohibit the enactment of new taxes after January 1, 2026, on the ownership or control of retirement holdings, individually owned assets and other forms of personal savings. It would also prohibit retroactive taxes that impose liability based on conduct, activities or a status that occurred or was present prior to the tax's effective date. That retroactivity prohibition is directly aimed at the Act's January 1, 2026, residency determination date.

The interaction among these measures presents a genuine procedural risk to Proposition 40. Under California law, when competing measures appear on the same ballot and more than one is approved, the measure receiving the greater number of affirmative votes prevails. Both Propositions 41 and 42 expressly provide that any conflicting measure receiving fewer votes would not go into effect. Accordingly, even if Proposition 40 is approved by voters, it could be nullified if either Proposition 41 or 42 also passes and receives more votes.

Conclusion

Potentially affected individuals and their advisors should begin by documenting January 1, 2026, residency, building a complete worldwide asset and liability inventory, reviewing trust ownership and distribution rights, and identifying transfers and charitable commitments made after October 15, 2025. Given the potential liquidity burden for taxpayers whose wealth is concentrated in illiquid or low-basis assets, affected individuals should engage tax, valuation, trust and liquidity advisors early to evaluate planning options and documentation needs. The anti-avoidance provisions contained in the Act should be considered before undertaking complex planning.

Holland & Knight attorneys will continue monitoring this issue closely and have been actively advising clients who may be impacted. For more information or specific questions regarding the proposed billionaire tax, contact the authors.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.