The content in this article was originally presented via a Lathrop GPM webinar. You can access the recording here.
State wealth taxes are no longer an academic topic. Several states are now moving from talking about these taxes to putting them into legislative proposals. Unlike income taxes, wealth taxes would tax what you own rather than what you earn, and they could reach individuals, trusts and potentially privately held businesses.
For now, most families do not need to make dramatic changes. The legislative landscape remains uncertain, and reacting too quickly may cause more problems than it solves. Good planning remains the best response: documenting where you live, understanding how your assets would be valued and knowing where cash would come from if a tax ever came due. In this article, we outline what is being proposed, why these taxes are so difficult to implement and what you may want to consider now.
What Is a State Wealth Tax?
A wealth tax totals the value of everything you own and applies a tax rate, usually a flat rate, to that amount. That is different from the higher income tax rates some states are adopting for top earners, although the two are often conflated in the media. In effect, a wealth tax functions more like an excise tax on what you have than an income tax on what you receive.
Which States Are Proposing Wealth Taxes?
California and Minnesota are leading the discussion, and they represent opposite ends of the spectrum. California voters will consider Proposition 40, the Billionaire Tax Act, on the ballot on November 3. If approved, it would impose a one-time tax equal to 5% of net worth on individuals who were California residents on January 1, 2026, and whose net worth (worldwide assets, including a spouse’s, less debts) is $1 billion or more. The rate is reduced for individuals with net worth below $1.1 billion. The tax would also apply to certain trusts, including grantor trusts that may not be in the grantor’s estate for estate tax purposes. Charitable pledges made after October 15, 2025, would not reduce net worth, and property given away for less than its value after that date would generally still count toward it.
Minnesota’s House File 4616 (HF 4616) proposed an annual 1% tax on Minnesota-sitused wealth (property located in Minnesota, less debts) exceeding $10 million. That is by far the lowest threshold of any proposal seen nationally. The tax would apply to individuals and certain trusts, and it would reach nonresidents as well as residents who hold Minnesota-sitused assets, including assets held through pass-through entities. The Minnesota Department of Revenue estimates that approximately 5,600 taxpayers would be affected each year. The bill did not come up for a vote before the 2026 session ended, but it is expected to reemerge in 2027. Hawaii, Illinois, New York, Pennsylvania and Rhode Island have also seen wealth tax proposals.
Why Are Wealth Taxes So Hard to Implement?
Wealth taxes are easy to describe but difficult to carry out. Valuation, liquidity, administration and legal challenges all create substantial barriers.
Valuation
An annual wealth tax could require families to appraise their assets every year. Appraisers, businesses, individuals, accountants and others involved in that process are not ready for the burden that would create.
California’s measure would set aside many of the valuation discounts commonly used for federal estate tax purposes. Publicly traded assets would be valued at their market trading value. For private businesses, the measure presumes a value equal to book value plus 7.5 times average annual book profits, multiplied by the owner’s percentage. No discounts can be used to reduce a partial interest below its pro rata share of the whole, which rules out typical discounts for lack of marketability or control. Smaller companies may not have the information needed to apply that formula accurately, and owners who cannot obtain it must submit a certified appraisal.
Liquidity
Wealth and cash are not the same thing. The founder of a successful private company may have a substantial net worth on paper, but have relatively little cash available to pay a wealth tax. The same is true for commercial real estate and private fund investors. These families could be forced to refinance, borrow or sell assets quickly to generate liquidity. In volatile markets, a taxpayer could even end up paying tax on wealth that later proves to have been largely illusory.
Administration and costs
States would need valuation experts, auditors and attorneys to administer these taxes. Families would face recurring appraisal and compliance costs that, if similar to an estate tax return, could reach tens of thousands of dollars or more each year. California’s measure also carries penalties for understatement of tax, and appraisers who misvalue an asset could face penalties of the same amount as a taxpayer from a resulting understatement.
Legal challenges
The proposals raise significant constitutional questions. Under due process principles, can a state tax a trust in another state, such as South Dakota, simply because a California resident transferred property to it? Proposition 40 expressly reaches such trusts. Under the federal Commerce Clause of the U.S. Constitution, what happens if two states try to tax the same wealth? The measure apportions 100% of the tax to California, with limited relief and a credit for wealth taxes paid elsewhere. In California, Proposition 13 caps property taxes at 1%. And although Proposition 40 excludes real estate held directly or through a revocable trust, it would still reach real estate held through LLCs and other trusts – purporting to state that the tax is not a property tax subject to Proposition 13. Whether that approach would hold up to legal challenges remains an open question.
Why Does Residency Matter So Much?
Because most wealth tax proposals target residents of the taxing state, the key question may be whether a person is subject to the tax at all. States already conduct detailed residency audits for income tax purposes. Minnesota, for example, considers 25 factors and may subpoena flight and cell phone records. With hundreds of millions of dollars potentially at stake, scrutiny would only increase. Multi-state families, snowbirds, family office principals and recently relocated taxpayers face the highest risk. Trusts add another layer of complexity, including questions about trust situs, where trustees and beneficiaries live and where the trust is administered.
Should You Make Changes Now?
For most families, not yet. Taking some steps make sense regardless of what happens, however, and many of them strengthen estate planning generally. Experience administering estates shows that liquidity is too often treated as an afterthought.
Key Considerations
- Document your residency – If you are on the fence between two states, act on the assumption that an audit is coming and keep records that support your position.
- Get valuation-ready – Business owners can benefit from understanding how a closely held company might be valued to help avoid surprises.
- Map your liquidity – Consider where cash would come from to satisfy a significant tax obligation without a forced sale.
- Review trusts and ownership structures – Trustees may want to evaluate trust situs, trustee location and multi-state contacts.
- Coordinate with your advisors – Bring your financial advisor and estate planning attorney into the conversation together.
- Monitor legislative developments – California’s vote is an important bellwether, and Minnesota’s proposal is expected to return in 2027.
What This May Mean for You
Even if no wealth tax becomes law this year, the trend deserves attention. For questions about state wealth taxes, please contact either of the authors or one of our Private Client Services attorneys.