# High Net Worth Estate Planning Examples: Four California Families by Net Worth

> Four hypothetical California families at $12M, $45M, $180M and $1.5B: problems ranked in dollars, the plan, and the numbers before and after, with Prop 40.

Source: https://ridleylawoffices.com/estate-planning-examples-by-net-worth/

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

**Who this page is for:** all four estate-size bands. Family A sits under $15 million single and $30 million married, where there’s no federal estate tax and the work is basis, Prop 19, probate and liability. Family B is in the $15 million to $100 million band. Family C is in the $100 million and up band. Family D is past $1 billion, where Prop 40 is on the November 3, 2026 ballot.

**Every family on this page is hypothetical.** The names, facts and numbers were invented to show how the rules work. None of it comes from a client file.

High net worth estate planning looks different at every level. A $12 million California couple owes no federal estate tax in 2026, so their plan is about keeping the community property step-up, using Prop 19 for the house, and avoiding probate. A $45 million founder needs QSBS and a GRAT in place before a buyer shows up. A $180 million real estate family needs entity planning that doesn’t trigger a Prop 13 reassessment, plus cash to pay a large estate tax. A $1.5 billion family has to look at Prop 40 and the federal estate tax side by side. Each example below shows the facts, the problems ranked by dollars, the plan, the numbers before and after, and what goes wrong without it.

**$15,000,000**

Federal estate tax exclusion per person, 2026 (Rev. Proc. 2025-32)

**40%**

Top federal estate tax rate (IRC § 2001(c))

**37.1%**

Top combined capital gains rate for a Californian: 20% + 3.8% + 13.3%

**5.6%**

Section 7520 rate, October 2026 (Rev. Rul. 2026-19)

**$1,044,586**

Prop 19 exclusion amount for transfers Feb. 16, 2025 to Feb. 15, 2027 (Board of Equalization)

**5%**

Prop 40’s one-time rate on the whole net worth of a resident worth $1.1 billion or more, if it passes and prevails

## The assumptions behind every number

Every figure below was computed in Python from the stated facts. These assumptions apply to all four families unless a family’s table says otherwise.

- Federal estate tax exclusion of $15,000,000 per person for 2026 (Rev. Proc. 2025-32). It’s indexed for inflation after 2026 (IRC § 2010(c)(3)). Projections hold it flat, which overstates future tax.
- Estate tax at 40% on the amount above the available exclusion (IRC § 2001(c)). For couples, everything passes to the survivor at the first death and the first spouse’s exclusion is kept, through portability or a credit shelter trust, so $30,000,000 is available at the second death.
- Capital gains at 37.1%: the 20% federal rate (IRC § 1(h)), the 3.8% net investment income tax (IRC § 1411) and California’s 13.3% top rate. California has no lower rate for capital gains (Franchise Tax Board).
- The October 2026 section 7520 rate of 5.6% for GRATs and CLATs, and the 4.61% mid-term applicable federal rate for a 9-year note (Rev. Rul. 2026-19).
- Property tax at an assumed 1.2% of assessed value: the 1% constitutional limit (Cal. Const., art. XIII A, § 1) plus an assumed 0.2% for local voter-approved debt. Your county’s rate will differ.
- Growth rates are stated in each family’s table. They are assumptions for illustration, not predictions.

## Family A: a $12 million married couple in Los Angeles County

### The facts

Mark is 74 and Ellen is 72. They married in 1980, and everything they own was earned during the marriage, so it’s community property (Fam. Code, § 760). They have two adult children. One lives in Sacramento. The other rents an apartment ten minutes from her parents.

| Asset | Value | Basis or assessed value |
| --- | --- | --- |
| House, bought in 1998 for $600,000 | $4,000,000 | Basis $600,000; Prop 13 factored base year value $977,232 for 2026-27 |
| Fourplex in a single-member LLC (disregarded for income tax), bought in 2004 for $1,300,000, deeded into the LLC in 2012 | $2,500,000 | Adjusted basis $700,000; factored base year value $1,885,305 |
| IRAs | $2,000,000 | Pre-tax |
| Brokerage account | $3,000,000 | Basis $1,000,000 |
| Cash | $500,000 | |
| Total | $12,000,000 | |

The house’s factored base year value comes from the Board of Equalization’s inflation factors for every roll from 1999-2000 through 2026-27, which multiply to 1.6287 (BOE Letter to Assessors No. 2026/002).

### The problems, largest first

There’s no federal estate tax here. $12 million is under one person’s $15 million exclusion. The problems are income tax, property tax and probate, ranked by the dollars at stake:

1. Losing the step-up in basis: $2,671,200 Property inherited at death takes a basis equal to its value at death (IRC § 1014(a)). For community property, the surviving spouse’s half steps up too (§ 1014(b)(6)), so the survivor can sell everything at the first death with almost no gain. If Mark and Ellen deed the house, the brokerage account and the fourplex to the kids now, the kids take the parents’ old basis (IRC § 1015). Selling at today’s values would then cost $2,671,200 in tax on $7.2 million of gain.
2. Property tax on the house: up to $397,182 more over 10 years A child who doesn’t live in the house gets it reassessed to $4 million. Over 10 years that’s about $525,587 in tax, against $128,405 on the parents’ current base. Prop 19 cuts it for a child who moves in, as explained below.
3. Probate at the second death: $226,000 Without a funded trust, the house, fourplex LLC interest, brokerage and cash, $10 million in all, go through probate when the second spouse dies. California sets the executor’s fee and the attorney’s fee by statute on the gross value, without subtracting debt (Prob. Code, §§ 10800, 10810). That’s $113,000 each. At the first death, property left to the surviving spouse passes without probate (Prob. Code, § 13500).
4. Reassessment of the fourplex at the second death: about $80,769 over 10 years Prop 19 doesn’t help a rental at all. When Mark and Ellen deeded the fourplex to their LLC for 100% of its interests, the transfer was excluded from reassessment (Rev. & Tax. Code, § 62, subd. (a)(2)), but it made them “original coowners.” Once they transfer more than 50% of the interests, cumulatively, the building is reassessed (§ 64, subd. (d)). Their deaths will do it. The LLC changes nothing about that.

The IRAs get no step-up at all because they’re income in respect of a decedent (IRC § 1014(c)), and the timing of the withdrawals drives the tax. The fourplex also exposes the family to tenant claims.

### The plan

- **A community property trust.** A joint revocable trust that holds everything, with a written statement that the assets are and remain community property. A transmutation of property between spouses has to be in writing by an express declaration (Fam. Code, § 852), and the California Supreme Court held the writing must expressly say a change in character is being made (*Estate of MacDonald* (1990) 51 Cal.3d 262). That keeps the double step-up provable at the first death, worth $1,150,100 if the survivor sold everything compared with a half step-up. See [community property vs. separate property step-up](https://ridleylawoffices.com/community-property-step-up-vs-separate-property-california/) and [transmutation agreements](https://ridleylawoffices.com/transmutation-agreements-trust-california/).
- **Nothing deeded to the kids during life.** Holding the assets to death keeps the step-up and avoids a reassessment now.
- **The house goes to the daughter who will live in it, if she wants it.** Under Prop 19 a child who makes the inherited house her principal residence within a year keeps the parents’ factored base plus up to $1,044,586 of value. Anything above that is added to the base (Rev. & Tax. Code, § 63.2, subds. (a)(1), (d)). She must claim the homeowners’ exemption within a year (Board of Equalization). On a $4 million house that’s a base of $2,955,414 instead of $4,000,000. The trust equalizes her brother from other assets. See the [Prop 19 parent-child exclusion](https://ridleylawoffices.com/prop-19-parent-child-exclusion-california/).
- **The fourplex reassessment is budgeted, and the LLC files are clean.** When a change in control or ownership of an entity happens, the entity has 90 days to file with the Board of Equalization. Missing it costs a penalty of 10% of the new taxes (Rev. & Tax. Code, § 482, subd. (b)). The LLC and the landlord insurance stay in place for liability. See [asset protection for landlords](https://ridleylawoffices.com/asset-protection-landlords/).
- **IRA beneficiary designations name the spouse first.** A surviving spouse is an “eligible designated beneficiary” and isn’t held to the 10-year rule. Adult children aren’t eligible designated beneficiaries, so they must empty inherited accounts within 10 years (IRC § 401(a)(9)(E)(ii), (H)). See the [inherited IRA 10-year rule](https://ridleylawoffices.com/inherited-ira-10-year-rule-california/).
- **A portability election at the first death, if the numbers grow.** The survivor can use the first spouse’s unused exclusion only if the executor files a timely estate tax return electing it (IRC § 2010(c)(5)(A)). The IRS allows a late portability-only return up to the fifth anniversary of death (Rev. Proc. 2022-32). See [estate tax portability](https://ridleylawoffices.com/estate-tax-portability-california/).

### The numbers before and after

| Item | Wrong move or no plan | With the plan | How it was computed |
| --- | --- | --- | --- |
| Capital gains tax if the kids sell after both deaths | $2,671,200 | $0 | Deeded now: carryover basis (IRC § 1015). Gain of $7,200,000 (house $3,400,000, brokerage $2,000,000, fourplex $1,800,000) x 37.1%. Held in the trust: basis = value at death (IRC § 1014). |
| Probate fees at the second death | $226,000 | $0 | No funded trust: $10,000,000 probate estate (IRAs excluded); statutory fee of $113,000 each to executor and attorney (Prob. Code §§ 10800, 10810). Trust administration costs are not set by statute and aren't shown. |
| House property tax, 10 years after a child takes it | $525,587 | $388,332 | Rented out: reassessed to $4,000,000. Child moves in: Prop 19 value of $2,955,414 (factored base $977,232 plus the excess over factored base + $1,044,586). 1.2% assumed rate, 2% annual increase. For comparison, the parents' own bill over the same 10 years: $128,405. |
| Federal estate tax | $0 | $0 | $12,000,000 is under one $15,000,000 exclusion. |

### What goes wrong with no plan or the popular wrong move

The popular wrong move is putting a child on the deed “to avoid probate.” It does avoid probate on the house. It also gives up the step-up on whatever was given, reassesses the house now unless that child moves in within a year, and puts the house within reach of the child’s creditors and divorce. On this balance sheet the step-up alone is $2.67 million. If the fourplex had been an LLC taxed as a partnership instead of a disregarded entity, the buildings inside wouldn’t step up at all after a death unless the LLC had a § 754 election in place (IRC § 754).

Doing nothing costs less but isn’t free. With no funded trust, the second death puts $10 million through probate at $226,000 in statutory fees.

## Family B: a $45 million founder before the exit

### The facts

Priya is 41 and Sam is 40. They live in Santa Monica with two children, 9 and 6. In August 2025 Priya founded a Delaware C corporation and was issued founder stock for almost nothing. The stock was acquired after July 4, 2025, the day Pub. L. 119-21 was enacted, so the new QSBS rules apply. Bought during the marriage, the stock is community property.

| Asset | Value | Basis |
| --- | --- | --- |
| Founder stock, issued August 2025 (QSBS-eligible) | $40,000,000 (qualified appraisal, before any term sheet) | About $0 |
| House equity | $2,500,000 | |
| Brokerage account | $2,000,000 | |
| 401(k) | $500,000 | |
| Total | $45,000,000 | |

The assumption that drives everything: a buyer pays $100 million for Priya’s stake in October 2030, about five years and two months after the stock was issued. That’s growth of about 25.7% a year from today’s appraisal.

### The problems, largest first

1. Federal income tax on the sale: $20,230,000 with no planning For stock acquired after July 4, 2025, IRC § 1202 excludes 50% of the gain after three years, 75% after four and 100% after five (§ 1202(a)(1)(B), (a)(5)). The exclusion stops at $15 million of gain per taxpayer per company (§ 1202(b)(4)(B)), indexed after 2026. A married person filing separately gets half the limit (§ 1202(b)(3)), so Priya and Sam on a joint return have one $15 million limit between them. The other $85 million is taxed at 23.8%. Sell before the three-year mark and there’s no exclusion at all: $23,800,000.
2. Federal estate tax: $16,588,000 if both die after the sale After income taxes the couple would hold about $71.5 million. Above their $30 million of combined exclusion, that’s taxed at 40%.
3. California income tax: $13,300,000 California doesn’t follow § 1202 (Rev. & Tax. Code, § 18152). It taxes the whole $100 million gain at 13.3% for residents. That’s the number that tempts founders to move.

### The plan, signed before any term sheet

- **QSBS stacking with two non-grantor trusts.** Each child gets an irrevocable non-grantor trust funded now with 15% of the stake, appraised at $6 million each. A gift of QSBS keeps its character and the donor’s holding period (IRC § 1202(h)(1), (2)(A)). Each trust is its own taxpayer with its own $15 million limit. The trusts have different primary beneficiaries, which matters because two or more trusts with substantially the same grantor and primary beneficiary can be treated as one when a principal purpose is avoiding income tax (IRC § 643(f)). The gifts use $12 million of the couple’s $30 million exclusion. Because the stock is community property, each spouse joins in writing (Fam. Code, § 1100, subd. (b)). See the [QSBS and section 1202 guide](https://ridleylawoffices.com/qsbs-section-1202-california/).
- **A 2-year zeroed-out GRAT with another 25% of the stake.** At the 5.6% October 2026 section 7520 rate, a $10 million GRAT pays the couple $5,423,813 a year for two years and leaves a taxable gift near zero (IRC § 2702). At the assumed growth, $3,567,491 of stock passes to a trust for the children in 2028 and grows to $5,640,699 by the sale. See the [GRAT guide](https://ridleylawoffices.com/grantor-retained-annuity-trust-grat/).
- **Why the two tools pull against each other.** A GRAT and a sale to an [intentionally defective grantor trust](https://ridleylawoffices.com/intentionally-defective-grantor-trust-idgt/) work because they’re grantor trusts: the founders pay the income tax and the trust’s assets are treated as theirs for income tax (IRC § 671). That same rule means GRAT stock shares the couple’s one $15 million QSBS limit. Only the non-grantor trusts add new limits.
- **A dated appraisal.** Gifts and the GRAT are funded at a qualified appraisal dated before any letter of intent. The [2026 gift tax return](https://ridleylawoffices.com/gift-tax-2026-california/) discloses each transfer.

### The numbers before and after

| | Sell Oct. 2027, no plan | Sell Oct. 2030, no plan | Sell Oct. 2030, with the plan |
| --- | --- | --- | --- |
| QSBS exclusion | None (held under 3 years) | $15,000,000 (one cap, joint return) | $45,000,000 (couple $15,000,000 + each child's trust $15,000,000) |
| Federal income tax | $23,800,000 | $20,230,000 | $13,090,000 |
| California income tax (13.3%, no QSBS) | $13,300,000 | $13,300,000 | $13,300,000 |
| Estate after taxes (incl. $5,000,000 other assets) | $67,900,000 | $71,470,000 | $46,959,301 |
| Federal estate tax, both die after the sale | $15,160,000 | $16,588,000 | $11,583,721 |
| Held in the children's trusts outside the estate | $0 | $0 | $31,650,699 |
| Total reaching the children | $52,740,000 | $54,882,000 | $67,026,279 |

The plan saves $7,140,000 of federal income tax on the sale, by adding two $15 million QSBS limits, and moves value out of the estate before it grows. The children end up with $67,026,279 instead of $54,882,000, a difference of $12,144,279. California’s $13,300,000 doesn’t move in this model, because the kids’ trusts are assumed to be taxed in California.

### California tax on the exit, and the temptation to leave

California taxes a non-grantor trust’s income when a trustee or a beneficiary whose interest isn’t contingent is a California resident (Rev. & Tax. Code, § 17742). In *Steuer v. Franchise Tax Bd.* (2020) 51 Cal.App.5th 417, the court held that a beneficiary whose share depended on the trustee’s discretion was a contingent beneficiary, but that California still taxes trust income from California sources whatever the trustees’ residence. A trust with no California trustee and only discretionary California beneficiaries may be able to defer California tax on the gain, but when accumulated income is later paid to a California beneficiary it’s taxed to her then (§ 17745, subd. (b)). Since 2023, an incomplete-gift non-grantor trust is taxed as a grantor trust in California (§ 17082). The [Nevada trust page](https://ridleylawoffices.com/nevada-trust-california-taxes/) walks through these rules.

Moving before the sale is the other route. A nonresident’s gain from selling stock generally isn’t California-source income unless the stock has a business situs in California (Rev. & Tax. Code, § 17952). But California treats anyone here for other than a temporary or transitory purpose as a resident (§ 17014), and the Franchise Tax Board weighs where the spouse and children live, the principal residence, the state that issued the driver’s license, vehicle registration, professional licenses and voter registration (FTB Publication 1031). A move made in the months before closing, with the family still in Santa Monica, is the fact pattern that gets audited. See [leaving California for tax reasons](https://ridleylawoffices.com/leaving-california-taxes/).

### What goes wrong with no plan or the popular wrong move

The popular wrong move is waiting until a buyer appears. After a letter of intent, the stock is appraised near the deal price, so the same gifts use far more exclusion and the GRAT has little growth left to capture. In Chief Counsel Advice 202152018, a donor created a 2-year GRAT three days after receiving offers and funded it at a value from an appraisal about seven months old. IRS counsel concluded the annuity didn’t qualify under § 2702, which would make the whole transfer a taxable gift. Waiting until the deal is nearly done invites the assignment-of-income doctrine, too (*Hoensheid*, below). The second wrong move is selling too early. A sale in October 2027 gets no QSBS exclusion and leaves the children $52,740,000 instead of $54,882,000.

## Family C: a $180 million real estate family

### The facts

Robert is 79 and Carol is 77. They bought apartment and commercial buildings in Los Angeles and Orange counties through the 1970s and 1980s, so the Prop 13 base is very low. In 2001 they deeded the buildings into five LLCs in exchange for 100% of the interests. Their property management and construction company, with 45 employees, runs every building. Two of their three children work in it.

| Asset | Value | Note |
| --- | --- | --- |
| Five real estate LLCs (net of mortgages) | $110,000,000 | Prop 13 assessed value $24,000,000, low basis |
| Property management and construction company (S corporation) | $30,000,000 | Manages all the family buildings |
| Residence, in the revocable trust | $8,000,000 | |
| Marketable securities | $22,000,000 | |
| Cash and other | $10,000,000 | |
| Total | $180,000,000 | |

### The problems, largest first

1. Federal estate tax: $60 million if both died in 2026 $180 million less $30 million of exclusion, at 40%.
2. Liquidity: a $28 million gap unless § 6166 applies Estate tax is due nine months after death. The family has $32 million of securities and cash. The rest is buildings and an operating company. Deferral under § 6166, below, is available only if the buildings count as an active business, and the IRS weighs that fact by fact.
3. Prop 13 reassessment at the second death: about $11.3 million over 10 years Because the 2001 transfer was excluded under Rev. & Tax. Code § 62(a)(2), Robert and Carol are the LLCs’ original coowners. When more than 50% of the interests have moved from them, cumulatively, every building is reassessed (§ 64, subd. (d)). Transfers between spouses don’t count (§ 63), so the first death doesn’t trigger it, but the second will. At the assumed 1.2% rate, the annual bill goes from $288,000 to $1,320,000. Prop 19 doesn’t help: its parent-child exclusion covers only a family home or family farm, and an interest in a legal entity isn’t “real property” for that exclusion (§ 63.2, subd. (e)(8)).

### The plan

- **LLC discounts done right.** The LLCs are recapitalized into voting and nonvoting interests. Robert and Carol give 35% of the interests, all nonvoting, to a dynasty trust, with a qualified appraisal. At an assumed 30% discount for lack of control and marketability, interests worth $38,500,000 pro rata are reported at $26,950,000, using most of their exclusion. Their GST exemption ($15 million each in 2026, Rev. Proc. 2025-32) is allocated so the trust is exempt for generations. The LLCs have run real businesses for 25 years, the parents keep plenty outside them to live on, and they don’t put their home in. See [family limited partnerships and LLCs](https://ridleylawoffices.com/family-limited-partnership-california/) and the [dynasty trust guide](https://ridleylawoffices.com/the-benefits-of-establishing-a-dynasty-trust-in-california/).
- **Stay under the 50% line.** The gift moves 35% of the interests. Because the parents are original coowners, transferring more than 50% now would reassess every building during their lives under § 64(d). The reassessment at the second death can’t be avoided. The plan doesn’t make it come sooner.
- **An ILIT for liquidity.** A second-to-die policy with an assumed $30 million death benefit, applied for and owned by an irrevocable life insurance trust from the start. Premiums are paid with gifts to the trust, which have to fit within the couple’s annual exclusions ($19,000 per recipient in 2026, Rev. Proc. 2025-32) and the roughly $3 million of exclusion left after the LLC gift. The numbers below don’t model premium cost. Life insurance proceeds are in the estate if the insured held incidents of ownership (IRC § 2042), and a transfer of an existing policy within three years of death pulls it back (§ 2035(a)). The trust buys buildings from the estate or lends it cash. See [irrevocable life insurance trusts](https://ridleylawoffices.com/do-i-need-an-irrevocable-life-insurance-trust-in-my-estate-plan/) and [split-dollar arrangements](https://ridleylawoffices.com/split-dollar-life-insurance-estate-planning/) for paying premiums.
- **Section 6166 as the backstop.** If a closely held business is more than 35% of the adjusted gross estate, the executor can defer the estate tax on it: interest only for up to five years, then up to 10 annual installments (IRC § 6166(a)). Interest is 2% on the deferred tax tied to the first $1,940,000 of taxable value above the exclusion for 2026 deaths (Rev. Proc. 2025-32) and 45% of the regular underpayment rate on the rest (IRC § 6601(j)). Rental real estate counts only if it’s an active business. The IRS has ruled that buildings can count when the owner holds a significant interest in a company that actively manages them (Rev. Rul. 2006-34). The family’s own management company is that fact.
- **A buy-sell agreement that doesn’t backfire.** If the operating company buys back a child’s shares with company-owned life insurance, the proceeds raise the company’s value for estate tax (*Connelly v. United States* (2024) 602 U.S. 257). A cross-purchase among the children, or insurance in the ILIT, avoids that. See [buy-sell agreements](https://ridleylawoffices.com/buy-sell-agreement-california/).

### The numbers before and after

| | No plan | With the plan |
| --- | --- | --- |
| Taxable estate at the second death (2041) | $374,207,072 | $294,168,337 |
| Adjusted taxable gifts added back | $0 | $26,950,000 |
| Federal estate tax (40% over $30,000,000) | $137,682,829 | $116,447,335 |
| Closely held business share of the estate (§ 6166 needs more than 35%) | 78% | 72% |
| Tax deferred under § 6166 (if the buildings count as an active business) | $107,086,645 | $83,529,360 |
| Tax due 9 months after death with § 6166 | $30,596,184 | $32,917,975 |
| Tax due 9 months after death if § 6166 is denied | $137,682,829 | $116,447,335 |
| Cash on hand (securities, cash, ILIT proceeds) | $66,525,702 | $96,525,702 |
| Dynasty trust, outside the estate and GST-exempt | $0 | $80,038,735 |
| If both died in 2026 instead: federal estate tax | $60,000,000 | $55,380,000 |

If both parents die in 2041, the plan cuts the estate tax from $137.7 million to $116.4 million and leaves $80 million in a GST-exempt dynasty trust. If they died right after the gift, the saving would be $4,620,000, the discount alone. The gift pays off as the trust’s share grows outside the estate. With a § 6166 election, only $32.9 million is due at nine months. If the IRS denies the election, the full $116.4 million is due against $96.5 million of cash, and the ILIT’s $30 million cuts the shortfall from $49.9 million to $19.9 million, which a loan or a sale of assets would have to cover.

### What goes wrong with no plan or the popular wrong move

With no plan, the estate tax is $137.7 million. A § 6166 election would cut the nine-month payment to $30.6 million, but if the IRS treats the buildings as passive investments, the whole tax is due against $66.5 million of securities and cash, and the executor sells buildings into whatever market exists. The popular wrong move is a deathbed partnership: a parent’s assets, sometimes the house too, go into a partnership in the last months of life to claim a discount. The Tax Court pulled the full value back into the estate in *Estate of Powell*, described below. The second wrong move is a gift of more than 50% of the LLC interests, which reassesses every building now.

## Family D: a $1.5 billion family under Prop 40

### The facts

Daniel is 70 and Grace is 68. They were California residents on January 1, 2026. Most of their wealth is stock in the company Daniel founded, which is now public. In 2014 they funded a non-grantor dynasty trust for their children with $10 million of company stock. It’s now worth $100 million and isn’t part of the $1.5 billion below.

| Asset | Value | Note |
| --- | --- | --- |
| Public stock | $1,000,000,000 | Basis $15,000,000 |
| Private fund and company interests | $150,000,000 | |
| Homes and land in their revocable trust | $120,000,000 | |
| Commercial buildings in an LLC | $60,000,000 | Book value $25,000,000; average book profits $4,000,000 |
| Art and collectibles | $50,000,000 | |
| IRAs and 401(k)s | $5,000,000 | |
| Cash and bonds | $115,000,000 | |
| Total | $1,500,000,000 | |

### The problems, largest first

1. Federal estate tax: $588,000,000 if both died in 2026 $1.5 billion less $30 million of exclusion, at 40%. This exposure exists whatever happens on November 3.
2. Prop 40, if it passes and prevails: $73,250,000 Proposition 40 would impose a one-time tax for 2026 of 5% of net worth on California residents worth $1 billion or more, with a married couple treated as one taxpayer. Residency is fixed on January 1, 2026 and net worth on December 31, 2026 (proposed Rev. & Tax. Code §§ 50301, 50308, subds. (a), (n), (o)). The measure is on the November 3, 2026 ballot. If it fails, none of this applies. The Legislative Analyst notes that if Proposition 41 or 42 gets more yes votes, courts could find a conflict that stops Prop 40 from becoming law. The [Prop 40 guide](https://ridleylawoffices.com/california-billionaire-tax-prop-40/) explains the measure in full. This page takes no position on it.

### The Prop 40 computation, as written

Following the measure’s text, line by line:

- Real property held directly or through a revocable trust isn’t counted (proposed § 50303, subd. (c)(4)). The $120 million of homes and land drops out.
- Real estate inside an LLC is valued as a business interest, under the presumption of book value plus 7.5 times average book profits, times the ownership share (§ 50303, subd. (c)(3)(E)). For the LLC that’s $25 million plus 7.5 times $4 million, or $55 million. Either side can override the presumption with a certified appraisal on clear and convincing evidence (subd. (c)(3)(F)).
- Qualified pensions and IRAs are exempt (subd. (c)(7)(A)). The $5 million drops out.
- Up to $5 million of art, collectibles and other non-public assets can be excluded (subd. (c)(9)). Art counts at $45 million.
- The couple’s base is $1,365,000,000. At 5%, their tax is $68,250,000.
- The 2014 dynasty trust counts toward the $1 billion test (subd. (c)(6)(B)), bringing the couple to $1,465,000,000. It’s also an “applicable trust” because a living billionaire funded it, and an applicable trust owes 5% of its own net worth. The couple may instead elect to fold it into their own base, and then the trust isn’t separately taxed (proposed § 50308, subd. (b)). Above $1.1 billion either route is 5%, so the trust adds $5,000,000.
- Total: $73,250,000, due with the 2026 California income tax return, or in five annual installments with a 7.5% charge on the unpaid balance (proposed § 50301, subd. (c)). Reading the charge as applying to the balance before each later payment, as the Prop 40 guide does, the installment total is $84,237,500.

### Prop 40 and the federal estate tax, side by side

| Step | Prop 40 as written (if it passes and prevails) | Federal estate tax (both die in 2026) |
| --- | --- | --- |
| Public stock | $1,000,000,000 at Dec. 31, 2026 market price | $1,000,000,000 |
| Private fund and company interests | $150,000,000 | $150,000,000 |
| Homes and land in the revocable trust | $0 (excluded, § 50303(c)(4)) | $120,000,000 |
| Commercial buildings in an LLC | $55,000,000 (book value $25,000,000 + 7.5 x $4,000,000 profits) | $60,000,000 |
| Art and collectibles | $45,000,000 ($5,000,000 excluded, § 50303(c)(9)) | $50,000,000 |
| IRAs and 401(k)s | $0 (exempt, § 50303(c)(7)) | $5,000,000 |
| Cash and bonds | $115,000,000 | $115,000,000 |
| Base | $1,365,000,000 | $1,500,000,000 |
| Exclusion | None above $1.1 billion | $30,000,000 |
| Rate | 5% | 40% |
| Tax on the couple | $68,250,000 | $588,000,000 |
| 2014 dynasty trust ($100,000,000) | $5,000,000 (5%, or folded into the couple's base by election) | $0 (outside the estate) |
| Total | $73,250,000 | $588,000,000 |
| Five-installment total | $84,237,500 | Not applicable |
| Federal estate tax after paying the couple's Prop 40 share | | $560,700,000 |

The two taxes interact in one direction. A dollar paid in Prop 40 tax is a dollar that isn’t in the estate when the second spouse dies, so it lowers the federal estate tax by 40 cents. If the couple paid their $68,250,000 share and then died, the federal estate tax would fall by $27,300,000, to $560,700,000.

### The federal plan, which doesn’t depend on November 3

The federal exposure is the larger number in every scenario. One illustration with two techniques: in 2027 the couple funds a 20-year [charitable lead annuity trust](https://ridleylawoffices.com/charitable-lead-annuity-trust-clat/) with $200 million, paying $16,874,991 a year to charity and zeroed out at the 5.6% rate. They also sell $300 million of stock to an [intentionally defective grantor trust](https://ridleylawoffices.com/intentionally-defective-grantor-trust-idgt/) for a 9-year note at the 4.61% mid-term AFR. At 7% growth, if both die in 2046, the estate tax drops from $2.31 billion to $1.93 billion. Part of that drop is money given away: the CLAT pays about $337 million to charity over 20 years. The family keeps $82.1 million from the CLAT and $180.8 million in the grantor trust. See [private foundation vs. donor-advised fund](https://ridleylawoffices.com/private-foundation-vs-donor-advised-fund/) for the charitable vehicle.

| | No federal planning | CLAT and sale to a grantor trust |
| --- | --- | --- |
| Estate at the second death (2046) | $5,804,526,694 | $4,849,820,528 |
| Federal estate tax | $2,309,810,677 | $1,927,928,211 |
| Passed outside the estate: CLAT remainder | $0 | $82,138,321 |
| Passed outside the estate: grantor trust after repaying the note | $0 | $180,769,273 |
| Paid to charity by the CLAT over 20 years | $0 | $337,499,823 |

Under Prop 40’s text, neither move would lower the 2026 number if done in 2026. A grantor trust’s assets are counted as the grantor’s, and the measure’s definition of grantor trust includes any trust whose assets would be in the grantor’s federal taxable estate (proposed §§ 50303, subd. (c)(6)(A); 50308, subd. (e)). Property put in a non-grantor trust in 2026 is counted in full (subd. (c)(6)(B)). A CLAT isn’t a “tax-exempt trust,” which the measure limits to trusts exempt under IRC § 501 (§ 50308, subd. (m)). Net worth is measured on December 31, 2026, so steps taken in 2027 don’t change it either way.

### What goes wrong with no plan or the popular wrong move

With no federal plan, the estate tax at the second death is $588,000,000 at today’s values. On the Prop 40 side, the moves people reach for don’t work under the text. Leaving California after January 1, 2026 doesn’t change who owes it, because residency is fixed on that date. A gift of more than $1 million made after October 15, 2025 stays in the giver’s net worth (proposed § 50303, subd. (c)(11)). Moving the homes into an LLC during 2026 for liability would take them out of the real property exclusion and add them to the base. Selling stock to pay any tax has a cost of its own: the public stock carries $985,000,000 of built-in gain that a step-up at death would erase (IRC § 1014). If the measure fails, it has no effect, and the federal plan above stands on its own. See [leaving California](https://ridleylawoffices.com/leaving-california-taxes/) and [expatriation and estate planning](https://ridleylawoffices.com/expatriation-tax-estate-planning/) for the rules on moving.

## The four families side by side

| | A: $12M couple | B: $45M founder | C: $180M real estate | D: $1.5B family |
| --- | --- | --- | --- | --- |
| Federal estate tax if both die in 2026, no plan | $0 | $6,000,000 (before the sale) | $60,000,000 | $588,000,000 |
| Largest problem | Losing the step-up ($2,671,200) | Federal tax on the sale ($20,230,000) | Estate tax and cash to pay it | Federal estate tax, then Prop 40 if it passes |
| California issue | Prop 19 on the house; § 64(d) on the LLC | 13.3% on the gain; no QSBS | § 64(d) reassessment at the second death | Prop 40 residency and valuation rules |
| Main tools | Community property trust, Prop 19, beneficiary designations | Non-grantor trusts for QSBS, GRAT | LLC gifts with discounts, dynasty trust, ILIT, § 6166 | CLAT, sale to a grantor trust, foundation |
| What the plan changes | Keeps $2,671,200 of step-up and $226,000 of fees | $12,144,279 more to the children | $21.2 million less estate tax by 2041, plus cash to pay the rest | $382 million less estate tax by 2046 (part given to charity) |
| Popular wrong move | Child on the deed | Waiting for the term sheet | Deathbed partnership, or more than 50% gifted | A rushed 2026 move to beat Prop 40 |

Family B’s 2026 line assumes they die before the sale, holding $45 million: $15 million above their $30 million of exclusion, at 40%.

## What the four have in common

The biggest number isn’t always the estate tax. For Family A it’s capital gains tax, and for Family B it’s income tax on the sale. Every plan starts by ranking the problems in dollars before picking a tool.

Timing decides most of the outcome. The step-up needs the asset held until death. QSBS needs three to five years. A GRAT or a gift needs to happen before a buyer sets the price. Prop 40, if it passes, looks at one day for residency and one day for value.

California rules sit on top of the federal ones and change the answer. The double step-up for community property, Prop 13 and Prop 19, the 13.3% rate with no capital gains break, and the trust residency rules all moved the numbers above.

Every plan turns on the same two questions, asked asset by asset: who owns it for income tax, and who owns it for estate tax. A grantor trust splits them on purpose. A gift to a child moves both at once and gives up the step-up. A non-grantor trust creates a new taxpayer. Answering those two questions for each asset is most of the work.

## What changes in California

- **Double step-up for community property.** Both halves of community property get a new basis at the first death (IRC § 1014(b)(6)). It’s why Family A’s trust says “community property” in writing.
- **Transmutation needs an express writing.** Fam. Code § 852 and *Estate of MacDonald* (1990) 51 Cal.3d 262.
- **Gifts of community property need both spouses.** One spouse can’t give away community personal property without the other’s written consent (Fam. Code, § 1100, subd. (b)). That governs Family B’s and Family C’s gifts.
- **Prop 13 and Prop 19.** Prop 19 helps only a family home or farm that the child moves into, up to the factored base plus $1,044,586 (Rev. & Tax. Code, § 63.2). Entity interests are outside it (§ 63.2, subd. (e)(8)), and LLC transfers are reassessed under § 64(c) and (d). It helped Family A’s house and none of Family C’s buildings.
- **No California QSBS.** Section 1202 doesn’t apply for California tax (Rev. & Tax. Code, § 18152). That’s Family B’s $13,300,000.
- **Top rate 13.3%, no capital gains preference.** Franchise Tax Board. It’s inside every capital gains number on this page.
- **Trust residency.** California taxes a trust when a trustee or a non-contingent beneficiary lives here (§ 17742; *Steuer*), and taxes accumulated income when it’s later paid to a California beneficiary (§ 17745). Incomplete-gift non-grantor trusts are grantor trusts for California since 2023 (§ 17082). These rules decide whether Family B’s trusts for the children pay California tax on the exit.
- **No California estate or gift tax.** California’s estate tax only picks up the old federal state death tax credit, which no longer exists, so none of the four families owes one. See [California estate tax in 2026](https://ridleylawoffices.com/california-estate-tax-planning-2026/).

## Cases won and lost

| Case | Who won | What it means for these families |
| --- | --- | --- |
| *Walton v. Commissioner*, 115 T.C. 589 (2000) | Taxpayer | A 2-year GRAT paying a fixed annuity to the grantor or her estate is a qualified interest, so a zeroed-out GRAT works. The court held the IRS’s regulation example “an unreasonable interpretation and an invalid extension of section 2702.” Family B’s GRAT relies on it. |
| *Estate of Hoensheid v. Commissioner*, T.C. Memo. 2023-34 | IRS | A donor gave company stock to a donor-advised fund two days before the sale closed. The court held the sale was a virtual certainty by then, taxed the donor on the gain, and disallowed the charitable deduction for lack of a qualified appraisal. Family B’s gifts happen before any term sheet for this reason. |
| *Estate of Bongard v. Commissioner*, 124 T.C. 95 (2005) | Split | Moving company stock into a holding LLC to prepare for a liquidity event had a legitimate and significant nontax reason, so the bona fide sale exception kept it out of the estate under § 2036. A family limited partnership formed by the same decedent, which did little after formation, didn’t qualify. Family C’s LLCs run real businesses. |
| *Estate of Powell v. Commissioner*, 148 T.C. 392 (2017) | IRS | A son, acting under a power of attorney, moved his mother’s $10 million of cash and securities into a partnership a week before she died in a California hospital. Her ability to join in dissolving the partnership was a retained right under § 2036(a)(2), and the gift he made of her partnership interest exceeded the power of attorney under California law. |
| *Connelly v. United States* (2024) 602 U.S. 257 | IRS | Life insurance a company held to redeem a deceased owner’s shares increased the company’s value for estate tax. The redemption obligation didn’t offset it. Family C’s buy-sell is structured around this. |
| *Steuer v. Franchise Tax Bd.* (2020) 51 Cal.App.5th 417 | Split | California taxes a trust’s California-source income regardless of where the trustees live. A beneficiary whose share depends on the trustee’s discretion is contingent, so her residence alone doesn’t make the trust’s other income taxable. Family B’s trusts are drafted with this in mind. |

**Don’t do this: a partnership formed on the deathbed.** In *Estate of Powell*, 148 T.C. 392 (2017), cash and securities went into a family partnership a week before death and the partnership interest was given to a charitable lead trust. The Tax Court included the assets in the estate under § 2036(a)(2) and held the gift of the partnership interest void or revocable because the power of attorney didn’t authorize it under California law. A discount needs a real entity, formed years ahead, with a nontax reason the family can prove.

## What works and what fails

| Move | Works when | Fails when |
| --- | --- | --- |
| Holding appreciated assets to death | The estate is under the exclusion, or the step-up is worth more than the estate tax saved by giving | A child is added to the deed “to avoid probate” (carryover basis, IRC § 1015) |
| QSBS stacking with non-grantor trusts | Trusts are funded early, have different primary beneficiaries and hold the stock 3 to 5 years | The trusts are grantor trusts, or substantially identical trusts trip § 643(f) |
| Zeroed-out GRAT | Funded at a current appraisal before a deal and the grantor survives the term | Funded on a stale value after offers arrive (CCA 202152018), or the grantor dies during the term |
| LLC gifts with discounts | The entity has a real business purpose and the parents keep enough to live on | Formed late, used as a personal account (*Powell*), or more than 50% moved by original coowners (§ 64(d)) |
| ILIT for liquidity | The trust owns the policy from the start | An existing policy is transferred within three years of death (IRC § 2035) |
| Rushing a move to beat Prop 40 | Rarely, under the text: residency was fixed January 1, 2026 | Gifts over $1 million after October 15, 2025 and 2026 trust funding are counted anyway |

For the full list of techniques and their failure modes, see the [estate planning strategies compared](https://ridleylawoffices.com/estate-planning-strategies-compared/) matrix and [strategies that backfire](https://ridleylawoffices.com/estate-planning-strategies-that-backfire/).

## Working with Ridley Law

These four examples are the starting point for real plans, which turn on facts no example can capture. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts.

The first call is free and runs 30 minutes, by phone or Zoom. [Book my 30-minute call](https://ridley.click/eric-30) or call 805-244-5291. For a quick read on federal exposure first, try the [estate tax calculator](https://ridleylawoffices.com/estate-tax-calculator/).

## Frequently asked questions

### What counts as high net worth for estate planning?

For federal estate tax, the line in 2026 is $15 million per person and $30 million for a married couple (Rev. Proc. 2025-32). Below that, as Family A shows, planning still matters for basis, Prop 19, probate and liability.

### Do I need estate tax planning if I’m worth $12 million?

Not for federal estate tax at 2026 levels. You do need planning to keep the step-up, avoid probate and use Prop 19. A portability election at the first death protects a surviving spouse if the estate grows.

### What is QSBS stacking?

Giving qualified small business stock to separate non-grantor trusts, each of which is its own taxpayer with its own $15 million exclusion limit under IRC § 1202. It works only if done well before a sale and the trusts aren’t treated as one under § 643(f). California doesn’t allow the exclusion at all.

### Does putting rental property in an LLC avoid Prop 13 reassessment?

No. If you deeded the property into the LLC for proportional interests, you become an original coowner, and once more than 50% of the interests transfer, cumulatively, the property is reassessed (Rev. & Tax. Code, § 64, subd. (d)). Prop 19’s parent-child exclusion doesn’t cover entity interests.

### Would Prop 40 apply to a family worth $1.5 billion?

If it passes on November 3, 2026 and prevails over Props 41 and 42, it would apply to California residents on January 1, 2026 whose net worth on December 31, 2026 is $1 billion or more, at up to 5%. Some assets, like directly held real estate and retirement accounts, aren’t counted. The [Prop 40 guide](https://ridleylawoffices.com/california-billionaire-tax-prop-40/) covers the details.

### Are these examples based on real clients?

No. All four families are hypothetical, and the facts were invented to show how the rules work.

This page is general information about California and federal law as of its update date. It isn’t legal, tax, or investment advice for your situation, and reading it doesn’t create an attorney-client relationship. All examples are hypothetical.

**Related reading:** [high-net-worth estate planning in California](https://ridleylawoffices.com/high-net-worth-estate-planning-california/); [ultra-high-net-worth estate planning](https://ridleylawoffices.com/ultra-high-net-worth-estate-planning-california/); [SLATs](https://ridleylawoffices.com/slat-trust-2026-california/); [private placement life insurance](https://ridleylawoffices.com/private-placement-life-insurance-ppli/); [generation-skipping trusts](https://ridleylawoffices.com/generation-skipping-trust-california/); [estate planning for real estate investors](https://ridleylawoffices.com/estate-plan-for-real-estate-investors/).

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