THE BILLIONAIRE TAX VS. THE OFFSHORE TRUST: INSIDE CALIFORNIA’S PROP 40 AND WEALTH PROTECTION
The landscape of ultra-high-net-worth individuals in California is facing a massive legal shift. On November 3, 2026, voters will decide on Proposition 40 – the 2026 Billionaire Tax Act.
If passed, Proposition 40 will impose a one-time 5% excise tax on the worldwide net worth of California residents and applicable trusts valued at $1 billion or more. Because this tax targets wealth globally, many are asking a critical question: can offshore asset protection structures shield wealth from a state-level wealth tax?
The short answer is NO!
CRITICAL MECHANICS OF PROPOSITION 40
Proposition 40 is engineered to prevent the standard exit strategies that ultra-wealthy individuals typically deploy. The legislation uses a lookback date. If you were a California resident on January 1, 2026, you are on the hook for the tax. Moving out of the state after the date does not eliminate your liability. Your worldwide net worth will still be officially valued on December 31, 2026.
The act specifically targets “applicable trusts.” The Franchise Tax Board (FTB) is granted broad powers to look through domestic and foreign trust structures to value asset distributions and beneficial interests.
While directly held personal real estate is exempt, any real estate held via corporate entities, LLCs, or limited partnerships remains fully taxable.
WHY OFFSHORE TRUSTS WILL NOT STOP THE WEALTH TAX
Many mistakenly believe that moving capital into an Offshore Asset Protection Trust in jurisdictions like the Cook Islands, or Belize legally removes those assets from the California tax bases. In reality, the legal frameworks overlap in dangerous ways.
Offshore trusts created by U.S. citizens are almost always categorized as grantor trusts by the IRS and the California FTB. Legally, the government “looks through” the trust. The assets are still considered yours for tax purposes, meaning their valuation must be included in your Prop 40 worldwide net worth calculations.
Failing to report offshore assets to evade a state tax is criminal tax evasion. The FTB utilizes existing federal reporting frameworks, such as the FinCEN FBAR (Form 114) and IRS Form 3520, to audit global net worth. If an asset is disclosed federally, California will find it.
While a foreign trustee can legally ignore a California court order to hand over trust funds, a California judge still holds personal jurisdiction over you. If a resident is ordered to repatriate offshore funds to settle a state tax debt and refuses, the judge can issue civil contempt sanctions, which can include immediate incarceration.
STRATEGIC TAKEAWAY
Offshore asset protection remains an incredibly powerful tool, but its purpose is litigation defense, not tax avoidance. An offshore trust will beautifully insulate your wealth from future civil lawsuits, malpractice claims, or predatory business judgments. However, it cannot insulate you from statutory government taxes like Prop 40.
To completely remove wealth from the scope of California’s aggressive tax reach, individuals must proactively sever all residency ties with the state, long before retroactive lookback dates are ever established.
If you need help determining the best asset protection strategies, we can help. Timing is NOW. Schedule your consultation. Becoming a business owner, you control your own destiny, choose the people you work with, reap big rewards, challenge yourself, give back to the community, and you get to follow your passion. Knowing what you’re getting into is smart business because the responsibility of protecting your business falls on you.
