Veteran tax-and-estate adviser Andrew Katzenstein was in his Los Angeles home earlier this year when he got a call from the family office of a longtime client about the proposal to impose a one-time, 5% tax on the net worth of California billionaires. His client, a real-estate investor with family in the state, was loath to pull up his roots and wanted Katzenstein to work with his team to figure out its implications for him.
The team of six set to work valuing the investor’s private company and tallying his net worth. His client plans to pay the tax if it is implemented and he’s subject to it, Katzenstein said. In the meantime, the investor has been looking at strategies that are as “tax-efficient” as possible, like speeding up his and his wife’s charitable-giving plans.
With help from their phalanx of tax and trust-and-estate advisers, California’s ultrawealthy are getting creative in the face of the proposed billionaire tax. If it becomes law, it would tax the net worth of billionaires who resided in California as of Jan. 1 this year, based on their net worth at the end of the year.
The state has already seen a few high-profile departures. Other billionaires plan to stay put. Some are looking to lower their net worth tally to slash their potential tax bill under the proposal, or trying to escape from the wealth tax’s net entirely. Others simply want to know where they stand so they can begin preparing, if necessary.
“People take steps to take advantage of the tax law before it changes all the time. This is just another example of that,” said Katzenstein, a partner at accounting firm HCVT who is advising multiple clients on the proposed tax.
It is a high-stakes question. The 5% tax would kick in at a net worth of $1.1 billion and higher, while lower tax rates would phase in at wealth levels ranging from just over $1 billion to just under $1.1 billion.
Katzenstein’s client has given away hundreds of millions of dollars to charity with his wife over the years. The investor said that, given the choice, he would rather their money go to charities that he and his wife know do good work than to California’s government, which he doesn’t trust to use the funds effectively.
He isn’t alone. An early employee of an artificial-intelligence company who has shares that vest to the tune of $300 million this year is worried that the payout will push him into wealth-tax territory, said Jon Feldhammer, a former IRS trial attorney who now is managing partner of Baker Botts’s San Francisco office. He and his client are trying to negotiate with the company so the unvested shares can be donated to charity.
A founder of a private company is considering the delay of a funding round to put off a higher valuation for his equity stake in his company, Katzenstein said. The delay could extend until 2027, but the founder could proceed with the raise earlier if the tax is voted down.
Tax-and-estate advisers are also helping clients restructure their balance sheets to make them more tax-efficient. They are advising on the pros and cons of transferring real estate out of limited liability companies into clients’ own names or into revocable trusts. Real estate “held directly” by a taxpayer or a revocable trust isn’t included in net worth under the proposed tax because it already is subject to property taxes. Advisers are also presenting the option to clients of splurging on a vacation home that they have had in their sights and owning it outright or placing it into a revocable trust.
Another strategy under discussion: buying expensive assets like art or yachts located outside the state and keeping them out of California, perhaps near or in an out-of-state vacation home. (The Act excludes from net worth “tangible personal property located outside California” if it has been outside the state for at least 270 days this year, assuming it hasn’t been temporarily moved “with a substantial purpose” of tax avoidance.)
An approach that likely wouldn’t affect a person’s net-worth tally but could lower a tax bill, advisers said, is taking money from other investments and putting them into Treasurys, as federal law doesn’t allow states to tax Treasurys.
But the available suite of potential workarounds is “relatively narrow” and likely to be of most use to the slice of the ultrawealthy near the threshold at which the tax starts taking effect, said Mike Harman, a wealth adviser at J.P. Morgan Private Bank in Irvine, Calif. He and other advisers caution that any moves could trigger other, cascading tax implications.
Whether any of the strategies ultimately works will depend on the specific facts in play, said David Gamage, a professor at the University of Missouri law school who helped draft the proposed tax.
“I like to tell my students this maxim of tax-planning: Pigs get fed, hogs get slaughtered,” Gamage said. “You can often get away with some amount of restructuring affairs, but if you go too far and get too greedy, you can get in trouble.”
The healthcare union behind the proposed wealth tax has estimated it could raise $100 billion in revenue to offset cuts to healthcare in President Trump’s signature tax-and-spending law last year. Critics have said the tax threatens innovation and the appeal of what is already one of the highest-tax states for the wealthy.
Debru Carthan, a radiologic technician and executive with the Service Employees International Union-United Healthcare Workers West, said in a statement, “It’s offensive that when so many people are struggling to afford gas, groceries and life’s necessities, there’s a group of billionaires who are fixated on avoiding paying their fair share.”
Advisers said one group that may have fewer planning options is Silicon Valley founders who are billionaires on paper but have relatively little in the way of liquid net worth. That’s partly because those entrepreneurs made the money themselves, Feldhammer said.
According to Feldhammer’s reading—which some take issue with—the Act taxes net worth when a wealth creator has transferred assets to trusts himself or herself. But those provisions don’t necessarily tax wealth transferred to trusts by others—say, parents or grandparents, said Feldhammer. “This targets self-made entrepreneurs more than multigenerational wealth,” he said of the proposed tax. “You have more options if you’re not the one who contributed assets to the trust.”
A complication: Advisers say the proposal leaves room for interpretation, making possible challenges from California’s Franchise Tax Board in the form of audits or assessments, which could, in turn, kick off legal battles. (The board is expected to issue regulations dispelling at least some of the ambiguity if the wealth tax takes effect.)
The proposal also contains an anti-avoidance rule, meaning measures taken that reduce a tax bill need to have “economic substance,” or a material reason for being made other than avoiding taxes.
Advisers said their clients typically have significant alternative reasons to make the changes they are contemplating. Clients worried about geopolitical instability or inflation are looking to shift a portion of their wealth into safe-haven assets like Treasurys, Katzenstein said.
Jennifer Kowal, a senior income-tax strategist at San Francisco-based IEQ Capital, said giving to charity can quickly and effectively lower a client’s balance sheet. The proposal says a charitable pledge won’t reduce net worth if it was made after Oct. 15, 2025; Kowal draws a distinction between a pledge versus a gift that actually is made.
She also thinks charitable gifts generally comply with the anti-avoidance provision. “I can’t imagine the state of California saying, we’re going to trigger the anti-abuse rule because you made a large charitable donation” given that donors have many nontax reasons to give, she said, loosely referring to the anti-avoidance rule.
Similarly, Kowal said moving real estate out of limited liability companies can remove the annual financial and administrative costs that come with maintaining LLCs.
Some of her clients have joked about divorcing, as the assets of married couples count toward an individual’s net worth.