California’s Billionaire Tax Sparks Concern Among Wealthy Residents

As the proposed billionaires’ tax set to roll out in November draws closer, some of California’s richest individuals are rushing to safeguard their wealth. They’re finding creative ways to adjust, like ramping up charitable donations, purchasing luxurious vacation homes, or even light-heartedly discussing the idea of divorce to mitigate the financial impact.

If enacted, the legislation would introduce a one-time tax of up to 5% on net worths exceeding $1.1 billion for Californians who were residents as of January 1, based on their asset values at year-end.

For those with assets slightly above $1 billion, the tax will gradually decrease.

This looming reality has led many wealthy Californians to seek out tax advisors, estate planners, and legal counsel, desperately searching for ways to alleviate or sidestep their potential tax liabilities.

While some affluent residents have already chosen to leave the state, many remain resolved to adapt to the situation.

According to veteran tax and real estate advisor Andrew Katzenstein, some clients, despite the proposal’s distressing nature, still prioritize staying in California. One of his long-term clients—a real estate investor deeply connected to the state—has no plans to move.

Investors and their advisors are striving to become more “tax efficient,” often looking at ways to hasten charitable giving that had been on their radar.

“People typically try to take advantage of tax laws before they alter, and this is just a case in point,” noted Katzenstein. He added that his client had donated hundreds of millions to various charities, believing in the value of giving rather than handing more to the state government.

Other wealthy individuals are exploring unconventional strategies.

John Feldhamer, managing partner at Baker Botts in San Francisco and a former IRS trial attorney, mentioned working with one of the early employees from an AI firm who anticipates stock worth about $300 million will vest this year, which might push him into billionaire tax territory. Feldhamer is strategizing ways for clients to donate unvested stock before it officially vests.

Some founders are even postponing funding rounds that might inflate their companies’ valuations and, consequently, their personal net worth.

Advisors are examining asset restructuring methods too. One tactic includes transferring real estate from a limited liability company into a revocable trust or personal ownership, as those properties would already incur property taxes and might not be included in the taxable net worth calculation.

Additionally, there’s talk of acquiring high-value assets outside California, such as artwork, yachts, or vacation homes, and keeping them off state premises.

However, experts caution that options are limited.

Wealth advisors have remarked that the range of tax planning strategies is “relatively narrow” and mostly advantageous for individuals nearing the tax threshold.

The law comprises anti-avoidance measures that promote meaningful economic justifications for transactions, rather than solely aiming to reduce taxes.

“I often tell my students this tax planning principle: Pigs get fed, pigs get slaughtered,” commented David Gammage, a law professor involved in drafting the proposal. He emphasized that while some restructuring can be beneficial, excessive greed can lead to complications.

Proponents of the bill, which has backing from various healthcare union groups, assert it could generate up to $100 billion to help offset federal healthcare spending cuts.

However, detractors argue that this tax could further tarnish California’s reputation as one of the priciest states for high earners.

“It’s outrageous that when many people are struggling to afford essentials, there are billionaires focused on dodging their fair share,” expressed Devru Karsan, a radiology technician and union leader.

In a more humorous vein, some wealthy clients have poked fun at the proposal, joking among couples about the potential necessity of divorce, since the tax would combine spouses’ assets for calculating individual net worth, according to Jennifer Kowal, an advisor at IEQ Capital.