CA Proposition 40 - What Advisors Should Be Planning For Now?

California’s Proposition 40, on the November 3, 2026 statewide ballot, would impose a one-time 5% tax on covered net assets of certain individuals and trusts that were California residents on January 1, 2026 and whose covered assets exceed $1 billion. The measure generally excludes real property, pensions, and retirement accounts; the Legislative Analyst’s Office states that liability would be due in 2027, with a five-year payment alternative at an additional cost. California Legislative Analyst’s Office, Proposition 40; California Attorney General, Official Title and Summary.

The January 1, 2026 residency reference means advisers should not assume that post-election restructuring, relocation, or transfers can eliminate a liability if Proposition 40 is adopted. Equally, the proposal’s coverage is limited: it is not a generally applicable annual wealth tax and it is not directly aimed at most high-net-worth and centi-millionaire households. Nevertheless, all three client tiers should treat the election as a catalyst for durable planning—clean ownership records, defensible valuation, liquidity engineering, governance, income-tax and estate-tax scenario modeling, and carefully documented decisions.

This memo recommends election-resilient actions. These are measures that retain practical value whether Proposition 40 passes or fails. They are not recommendations to undertake transactions solely to obtain a tax result. The final measure text and implementing guidance should be checked before any transaction or filing position is adopted.

Planning Premises and Guardrails

1.- Do not plan on post-election cure. For a potentially covered client, build the analysis from the initiative’s stated January 1, 2026 residency anchor and covered-asset framework. Post-election actions may still matter for future California income-tax exposure, succession, governance, and liquidity, but may not change a Proposition 40 result.

2.- Separate tax characterization from wealth-transfer and business objectives. A transfer, recapitalization, change of residence, charitable contribution, or financing transaction should have documented non-tax rationale, appropriate governance, and independent legal, tax, valuation, and fiduciary review.

3.- Plan for information asymmetry. Public-company and marketable-security values may be straightforward; closely held enterprises, venture interests, intellectual property, collectibles, carried interests, hedge-fund interests, and complex trust structures demand early inventory and valuation work.

4.- Avoid irreversible actions before a decision record exists. Advisors should use a written scenario matrix, identify the decision maker and fiduciary duties, quantify liquidity needs under each case, and preserve the factual record supporting residency, ownership, valuation, and purpose.

5.- Use the election to build an enduring operating model. The best immediate deliverable is not necessarily a transaction. It is an auditable family-office tax-and-liquidity dashboard capable of responding to a changing California and federal tax environment.

Common “Now” Agenda for Every Tier

1. Establish a verified personal and entity balance sheet

Create a consolidated schedule by owner, trust, entity, asset class, situs, liquidity profile, control rights, tax basis, built-in gain, restrictions, pledged status, and available valuation evidence. Reconcile legal title, beneficial ownership, trust interests, and capital-account data. Flag assets that are likely to be difficult to value or monetize.

2. Preserve California residency and domicile evidence

For each principal and relevant trust, prepare a contemporaneous file documenting days, homes, family location, business activities, voter registration, driver’s license, professional ties, charitable activity, and travel. This is essential both for clients remaining in California and for clients who have already completed, or may later consider, a bona fide change in domicile. Do not treat a formal address change as a substitute for facts.

3. Build valuation readiness

Identify valuation dates that may be relevant; engage qualified valuation professionals early for material nonmarketable assets; preserve cap tables, operating results, forecasts, board materials, term sheets, comparable-company analyses, and prior appraisals. Adopt a process for updating appraisals when a material event occurs.

4. Conduct a liquidity and credit review

Model tax, debt-service, capital-call, philanthropic, estate-administration, and family-distribution needs under stressed market conditions. Identify liquidity sources and their costs: cash, portfolio sales, dividends, distributions, borrowing capacity, asset-backed credit, and orderly sales of noncore holdings. Confirm governing-document authority and lender covenants before relying on an entity-level distribution or borrowing plan.

5. Refresh governance and fiduciary process

Update entity consents, investment-policy statements, family-office delegation matrices, trust-administration protocols, conflict-management procedures, and board calendars. Document why a contemplated action is prudent apart from tax considerations and obtain necessary independent approvals.

6. Run integrated federal and state scenarios

Model at least: (a) Proposition 40 fails; (b) Proposition 40 passes as currently described; and (c) later federal or California tax-law change affects income, transfer, or wealth-tax economics. Present after-tax cash flow, concentration risk, estate exposure, charitable capacity, and family distributions under each case.