California’s billionaire tax vote: what Proposition 40 would mean for trusts and life insurance

About 200 people would pay California's proposed billionaire tax, by CalMatters' count, and the money spent fighting over it runs to hundreds of millions of dollars. Opponents of Proposition 40 had raised more than $340 million by October 16, against just under $33 million for the yes side, The Guardian reported. Sergey Brin alone is spending more than $100 million against it, CBS News reported on October 18. On November 3, Californians decide whether anyone who lived in the state on January 1, 2026 and is worth $1 billion or more should pay a one-time tax of 5 percent of net worth.

Nobody can say with confidence how the vote will go. The Public Policy Institute of California had the measure ahead 52 to 46 among likely voters in early September; a Berkeley IGS poll of likely voters taken September 15 to 20 had it up 45 to 42, and two polls cited by Forbes had it behind by 4 and 15 points. On October 13, the prediction markets Kalshi and Polymarket priced its chance of passing at about one in four, Yahoo Finance reported. Those are trading prices, not polls. A week before The Guardian's tally, Gov. Gavin Newsom endorsed Proposition 42, a rival constitutional amendment funded by Brin that could block the tax even if a majority votes for it.

For families who hold life insurance through trusts, the questions are more technical. Proposition 40 never mentions life insurance, but its trust rules are written broadly enough to reach many of the structures in which large policies sit.

Who would pay, and when

The tax would apply to people who were California residents on January 1, 2026, with net worth measured on December 31, 2026. The rate would be 5 percent of total net worth, phasing in between $1 billion and $1.1 billion. On a $10 billion fortune, that is $500 million. The Legislative Analyst's Office says the tax would be due in 2027. It could be paid with the 2026 income tax or in five equal annual installments, with a nondeductible deferral charge of 7.5 percent a year on the unpaid balance. The wealth tax itself would not be deductible for state income tax. Billionaires whose tax would exceed the value of all their publicly traded assets could put illiquid holdings into an optional deferral account and instead pay 5 percent of any value later withdrawn or distributed from those assets, with the balance settled if the account is closed or at death.

Moving away now would not change the answer. The residence test looks only at January 1, 2026, and the standard rule apportions the whole tax to California "without reduction or multiplier based on residency history." A narrow alternative apportionment exists, but it turns on where the wealth was built, not on a later move. In January, the New York Post, citing Bloomberg, reported that at least six billionaires, Larry Page and Peter Thiel among them, had cut ties with the state. For anyone who was still resident on New Year's Day, both the economists who back the measure and Holland & Knight say a later move would not avoid the tax.

The base is wide: "all forms of personal property and wealth, whether tangible or intangible." Real estate held directly or through a revocable trust would be excluded, as would qualified pensions and IRAs, although Roth balances above $10 million would count. The measure is sponsored by SEIU United Healthcare Workers West. Ninety percent of the money would go to health care and the rest to education and food assistance; the measure's findings point to Medi-Cal funding losses from "the most recent federal budget legislation," and its spending rules name Public Law 119-21, the federal budget law of July 2025. The LAO expects "tens of billions of dollars" and says the timing and amount are very hard to predict. Economists who support the measure put the figure at about $100 billion over five years.

Valuing what does not trade

Wealth on this scale often sits in private companies, and the text works hard to stop it from being marked down. A private business would be presumed to be worth its book value plus 7.5 times its average annual book profits, multiplied by the owner's share, unless that presumption would substantially overstate or understate the real value. No business could be valued below the price set in a funding round or other equity sale within two years of the valuation date, unless the taxpayer shows by clear and convincing evidence that the price would significantly overstate it. Discounts that would push a partial interest below its pro rata share of the whole asset would not count, which ArentFox Schiff reads as ruling out minority and marketability discounts. A substantial understatement of the tax would carry a 20 percent penalty, and a gross understatement 40 percent.

The only place the word "insured" appears in the measure is a floor: no asset may be valued at less than the amount for which it is insured. ArentFox Schiff says over-insured assets may carry a floor equal to the insured amount, and Venable's planning advice on insured values points to fine jewelry, artwork and other collectibles. Neither mentions life insurance.

Two ways a trust is counted

The trust rules are where Proposition 40 reaches furthest. It defines a grantor trust as any trust that "would be a grantor trust for purposes of the income tax," and also any trust whose assets would be included in the grantor's estate for federal transfer tax. A trust that meets either test would have its net worth counted as the grantor's own.

That first limb reaches trusts common in estate planning. ArentFox Schiff notes that it could capture intentionally defective grantor trusts, which are built to sit outside the federal estate while their income is still taxed to the person who created them. Holland & Knight calls grantor trust treatment "broad." Trusts that are neither grantor trusts nor tax-exempt, and that have received property from a billionaire or a related person, would be taxed at 5 percent on their own net worth, with no separate $1 billion threshold, and property moved into such trusts would be added back to the creator's net worth in full for 2026 transfers and at 75 percent for 2025 transfers. So would property worth over $1 million transferred below fair market value after October 15, 2025.

Life insurance in a trust: a silent text

The measure says nothing about life insurance. Words such as "annuity," "cash value" and "surrender" never appear, and there is no valuation rule for a policy. Net worth is defined as the total value of all assets and property interests, so the cautious reading is that a policy would count like any other intangible asset, at fair market value. Any effect on a policy is a reading of the text, not a rule in it.

That leaves the question of which value. The text does not point to the death benefit. Federal gift tax has an answer that the measure does not adopt: under Treasury Regulation 25.2512-6, a newly bought policy is valued at its cost, and a policy in force with premiums still due may be approximated by its interpolated terminal reserve plus the unused part of the last premium, unless the contract's unusual nature makes that approximation unreliable. For a private placement policy, whose value sits in an investment account inside the insurer, that account is the obvious place any valuation would start.

Ownership then decides whose net worth the policy lands in. Large policies are often held in an irrevocable life insurance trust so that the insured holds no incidents of ownership and the proceeds stay out of the federal estate under section 2042 of the tax code. With the federal basic exclusion at $15 million per person in 2026, those trusts remain a standard tool. But a trust can be outside the estate and still be a grantor trust for income tax. Under section 677(a)(3), a grantor is treated as owning any part of a trust whose income may be used, without the consent of an adverse party, to pay premiums on insurance on the grantor's or spouse's life. Policies irrevocably payable to charity are an exception. A trust whose income can be used to pay those premiums meets that test, at least for that portion, so the policy's value could be counted in the grantor's net worth. Keeping a policy out of the federal estate does not, on this text, keep it out of the California base. Our guide to how grantor trusts work sets out the income tax rules behind that classification.

Propositions 42 and 41: the ballot can cancel itself

Proposition 42 would bar any state tax enacted on or after January 1, 2026 on the ownership or control of "retirement holdings, individually owned assets, and other forms of personal savings," and any tax keyed to residency on a date before it took effect, which is how Proposition 40 works. Proposition 41 would nullify new state taxes enacted after January 1, 2026 that exempt their revenue from the voter-approved spending limit. The LAO says that if Proposition 41 or 42 gets more yes votes than Proposition 40, courts could find a conflict and block the billionaire tax even if a majority approves it. Support for the rivals depends on the poll: PPIC's September survey had 54 percent of likely voters backing Proposition 42 and 51 percent backing Proposition 41, while the Berkeley IGS poll put them at 43 and 37 percent.

Proposition 3 reaches far more families

For the many families well below the billion-dollar line, the measure with the longer reach is Proposition 3. It would make permanent the higher income tax rates on top earners that voters approved in 2012, which are set to expire in 2031. California's top bracket in its 2025 rate schedule is 12.3 percent, a separate 1 percent Behavioral Health Services Tax applies to taxable income above $1 million, and the state has no lower rate for capital gains: the Franchise Tax Board says all capital gains are taxed as ordinary income. PPIC found 58 percent of likely voters in favor in September.

The state rate is what shapes the arithmetic of tax deferral. Growth inside a compliant policy is not taxed each year, and that deferral is worth more when the state rate is high and expected to stay high. Our guide to PPLI for California residents covers how the state treats policies.

December 31 is the date that would matter

If Proposition 40 passes and is not displaced by Proposition 41 or 42, the next date is December 31, when net worth would be measured. Residency was fixed on January 1, so a year-end review cannot change that test. What it can settle is how each trust holding a policy is classified, under either limb of the definition, and what the policy would be worth on that day.

This article is general information only and is not tax or legal advice.

Sources

California Secretary of State, Official Voter Information Guide, November 3, 2026 General Election: text, official summaries and Legislative Analyst's analyses of Propositions 3, 40, 41 and 42
CalMatters, "Gavin Newsom backs measure to kill the billionaire tax and ban future wealth taxes," October 9, 2026
CalMatters, Proposition 40 voter guide (updated October 13, 2026)
CBS News, report on Proposition 40, October 18, 2026
The Guardian, October 16, 2026
Berkeley IGS Poll, released September 25, 2026
Forbes, October 16, 2026
Yahoo Finance, "California's billionaire tax might now be dead on arrival," October 13, 2026
New York Post, citing Bloomberg, on billionaires leaving California (January 8, 2026)
Galle, Gamage, Saez and Shanske, revenue estimate for the 2026 Billionaire Tax Act (updated July 20, 2026)
Public Policy Institute of California, Statewide Survey, September 15, 2026
Holland & Knight, September 10, 2026
ArentFox Schiff, July 30, 2026
Venable, February 27, 2026
Treasury Regulation 25.2512-6
26 U.S.C. sections 677 and 2042
IRS, "What's new: Estate and gift tax"
California Franchise Tax Board, capital gains, 2025 tax rate schedules and 2025 Form 540 instructions