The California State Capitol in Sacramento, California.
A key theme that’s emerged in the first months of 2024 has been the tussle between major world jurisdictions vying for the attention of family offices, both new and established. While we’ve seen that trend play out at a country level (the ongoing competition between Singapore and Hong Kong is just one example), there’s additionally a state and regional level to consider.
Ahead of the Milken Global Conference - a gathering of thought and industry leaders across the wealth and technology sectors - that takes place in Los Angeles this May, it’s interesting to consider the vast differences between US-based jurisdictions ranging from East Coast states such as New York, Boston, and Florida, to the West Coast - including California, Washington, and Oregon.
California a state that captures the world’s imagination - not only given the rich heritage of its cities, but for the fact that it is so frequently the site of new wealth owners exploring family office solutions; whether they’ve gotten their start in Silicon Valley or in LA’s entertainment industry.
At the same time, many Americans have started to look for residencies beyond US borders. What, then, is the appeal for established and new family offices to preside themselves in the golden state?
High Tax Obligations
There are notable differences in California’s tax regime that exist both at state, and are further differentiated at, city level.
As of 2023, California has the highest state income tax rates in the US, with rates ranging from 1% to 13.3% based on income level. That’s further compounded by a base state sales tax rate of 7.25%, leading up to rates as high as 10.25% in some cities.
Further, California's capital gains tax rates align with its progressive income tax system. The tax rate is determined by an individual's taxable income and filing status. For instance, single filers with taxable income exceeding $1 million face the highest rate of 13.3%
Come January 1st, 2026, the state would tax wealth that exceeds $50 million at a rate of 1% each year, with an additional 0.5% tax on assets valued at more than $1 billion. Part-time residents would be taxed on a pro-rata share of their wealth based on the number of days they spend annually in California.
Notably, property taxes are further based on assessed value at the time of acquisition with limited annual increases of up to 2% - though that can be subject to local variations.
There are also considerations across major cities - San Francisco notably charges higher property taxes and has a gross receipts tax for business. Los Angeles charges business tax based on gross receipts with different categories for business activities.
…But Not Without Compelling Incentives
Despite high-income tax rates, the overall picture is more nuanced. For family offices seeking to relocate to California, an income tax credit is available and can vary in amount depending on focuses on job creation, economic impact, and competitiveness.
Perhaps more salient to emerging Silicon Valley wealth owners, there is a Research & Development Tax Credit available, where family offices that conduct qualifying research and development activities in California can benefit from a tax credit that offsets against income tax liability, valued at 15% of qualified expenses.
Beyond major cities such as San Francisco or LA, there are other alternatives - San Diego, specifically, does offer a lower business tax structure with enterprise zones that offer incentives for employment and investment.
Talent & Attracting Talent
California is nothing short of a melting pot of highly educated and specialised talent, with deep diversification in background and expertise. That is in part thanks to the state’s research institutions - all household names such as Stanford University, the University of California system, and Caltech - as well as California’s reputation as an innovation hub.
Addressing Challenges
Major cities in California are well-known for their high cost of living - adding a hurdle for family offices seeking a wide array of talent and knowledge. Thats compounded by the fact that California’s job market is exceedingly competitive thanks to an array of ever-emerging startups and top-tier businesses.
A Hub For Family Office Interest
Despite these obstacles, talent based in California can often have strong alignment between many of the same focuses current and next-generation family offices have; expertise and development in finance, technology, and entrepreneurship - specifically across investment management, sustainable investing, or tech innovation - often gravitate to the golden state. That can enable family offices with clear focuses in emphasising impact and professional growth opportunities to leverage a unique proposition in the job market.
Living The California Lifestyle
Perhaps one of the most sizeable advantages (and yet the most difficult to meaningfully quantity) for family offices seeking to operate in California is access to a premier lifestyle that’s well suited to both family and business activity. That’s not only due to being the centre of numerous financial hubs, but further the state’s transport links to both domestic and international travel.
Access to some of the educational institutions mentioned earlier aside, there’s also the fact that cities across the state offer cutting-edge healthcare and recreational opportunities. High-quality real estate, and office space, while at a premium, are also in abundance.
The West Coast Beckons
While California is perhaps the state that comes to mind for cutting-edge technology businesses and tech-trendy wealth owners, the state does form part of a trinity along the West Coast of the United States - with Washington and Oregon similarly capturing the imaginations of family offices.
Despite its tax rates and its high cost of living, California still continues to draw allure - and with a stream of new wealth owners created at each liquidity event, family offices (single or multi) will need to continue to evaluate the great state as a jurisdiction of choice.
