Proposition 40 has been widely labeled a “billionaire tax,” and the label is accurate: as drafted, the tax would apply only to individuals whose net worth is $1 billion or more. What is less obvious is how that net worth would be measured. The proposal combines spouses’ assets, counts interests in private companies, intellectual property and trusts, and adds back certain gifts already made. Couples, founders, owners of closely held businesses and families holding wealth through trusts may therefore cross the threshold sooner than they expect.

In short, Proposition 40 would impose a one-time tax of up to 5% on the worldwide net worth of individuals who were California residents on January 1, 2026 and whose net worth is $1 billion or more at the end of 2026. Because residency is fixed as of a date that has already passed, leaving California now would not, by itself, take someone outside the measure’s reach.

None of this is law yet. California voters will decide Proposition 40 on November 3, 2026, and approval at the ballot box would not necessarily end the matter: two competing measures could void it, and the initiative itself anticipates legal challenges.

Who Could Be Affected?

The tax would apply to an “applicable individual,” meaning a person who was a California resident on January 1, 2026 and whose worldwide net worth reaches $1 billion as of December 31, 2026. Importantly, that threshold is not measured only by the assets someone holds in his or her own name.

Three features of the proposal drive that result. First, a taxpayer and spouse would be treated as a single individual, and the spouse’s worldwide assets would be counted regardless of where the spouse lives. Second, net worth would include interests in privately held businesses and certain intellectual property, as well as assets held in grantor trusts and, for a trust beneficiary, trust assets to the extent they are distributable to that beneficiary. Third, the proposal looks backward: gifts exceeding $1 million made after October 15, 2025 would generally be added back to the donor’s net worth, while charitable pledges made after that date generally would not reduce it.

The proposal does not define “distributable,” and it does not specifically address contingent or discretionary beneficiaries. California’s existing income tax rules for trusts touch on the issue only tangentially, and while they may offer some guidance, the regulations remain ambiguous and insufficient to resolve the point with clarity. The Franchise Tax Board has not indicated how it would treat such beneficiaries, leaving significant uncertainty for affected families.

These rules do not expand which individuals may be taxed; they determine how an individual’s net worth is computed. But for couples and families whose ownership and estate-planning structures have become more complex over time, they may determine on which side of the $1 billion line someone falls.

The one exception is certain trusts. A non-grantor trust funded by an applicable individual would be treated as a separate taxpayer and could owe the tax on its entire net worth, without its own $1 billion threshold and regardless of where the trust is located. The trustee would generally be responsible for paying it, and assets of such a trust would not also be counted toward a beneficiary’s net worth. As a result, trustees and beneficiaries of these trusts could be affected even if they would not owe the tax themselves.

What Would Proposition 40 Do?

The tax would reach up to 5% of an applicable individual’s worldwide net worth. Net worth would generally include financial assets and ownership interests in public and privately held businesses, among other assets, but would exclude real property and certain qualified retirement accounts. Permitted debts could reduce net worth, subject to limitations in the initiative.

If the measure takes effect, the tax would be due April 15, 2027. Taxpayers could elect to pay it over five years, although later installments would carry a deferral charge.

What Happens Next?

Even if voters approve Proposition 40 on November 3, the tax may not take effect. Propositions 41 and 42, which appear on the same ballot, each contain provisions that would void Proposition 40 if either receives more affirmative votes. The measure also provides for expedited judicial review of legal challenges, and the questions it anticipates include retroactivity, due process and constitutional limits on the state’s power to tax.

That leaves considerable uncertainty. For now, the practical question for most people is not how to plan around Proposition 40, but whether its outcome is something they need to follow. Individuals whose wealth, business interests, trust structures or residency history could bring them near the threshold may benefit from understanding the proposal now. Should the measure ultimately take effect, its valuation, trust and anti-avoidance rules would call for a closer, fact-specific analysis.

The information contained in this article is general and informational in nature and does not constitute legal advice. Each situation is different and requires individualized analysis. If you have questions about how Proposition 40 could affect you, your family or your trust structures, please feel free to contact us.