The 2023-24 budget that Gov. Gavin Newsom put forward last month contains an intriguing one-paragraph proposal to close a loophole that allows wealthy Californians to set up trusts in other states and avoid state income taxes on their profits.

The proposal pertains to “incomplete non-grantor trusts,” or INGs. Under current law, profits earned on ING investments are taxable in the states in which they are formed but if the state has no income tax — such as Nevada — it means only the federal government taxes their proceeds.

It’s intriguing because the Franchise Tax Board, California’s income tax agency, first proposed to make out-of-state INGs subject to state taxation in 2021, after New York closed a similar loophole. But nothing was done until this year.

It’s also intriguing because it affects only a few hundred Californians and would raise perhaps $20 million, just a droplet in a $297 billion budget.

Finally, it’s intriguing because 13 days after Newsom unveiled his budget, New Yorker magazine published a lengthy article suggesting that the family of San Francisco billionaire Gordon Getty had set up trusts in Nevada for Getty’s daughters specifically to avoid California taxes.

Getty was something of a surrogate father to Newsom after his parents divorced and Getty’s personal trust, managed by Newsom’s late father, provided the seed money for Newsom’s PlumpJack wine and restaurant business.

Newsom’s father, William, was an appellate court judge, appointed by old family friend Jerry Brown, before leaving the bench to manage the trust. It was created in the 1980s after the Gettys persuaded the Legislature to change California trust law and thus allow Gordon to claim his share of J. Paul Getty’s immense fortune.

The New Yorker article delved into how wealthy people escape taxation and used the Getty trusts as an example, drawing on a lawsuit that a former manager for one trust, Marlena Sonn, has filed. She alleges she was fired and denied promised compensation after objecting to the tax avoidance strategy of trusts headquartered in a Reno strip mall and says it deprived California of as much as $300 million in taxes.

The article by Evan Osnos, titled “The Getty Family’s Trust Issues,” includes interviews with Sonn and members of the Getty family about what happened after she was recruited in 2013 to help manage affairs for two of Gordon Getty’s daughters, Kendalle and Sarah.

“Sonn assisted Kendalle and Sarah as they navigated the complications of their new wealth,” Osnos wrote. “To oversee the Pleiades Trust, Gordon’s family office had helped establish a corporate entity for each of the sisters, named for their initials: ASG Investments and KPG Investments. The sisters were the presidents, and Sonn became vice president.”

Sonn, in interviews with Osnos and one with this writer before the article was published, said the daughters wanted to remove the taint of oil money from their money and she helped them invest in environmentally and socially progressive organizations.

“Sonn said that she was also enlisted in ‘maintaining the appearance’ that Kendalle and Sarah neither resided nor transacted trust business in California, in order to minimize their exposure to state income tax, which ranges up to 13%,” Osnos wrote. “Across the family fortune, she said, ‘that’s a lot of tax on billions of dollars.’ While their grandfather (J. Paul Getty) had sought to duck taxes by claiming California residency, Sonn was helping the granddaughters attempt that maneuver in reverse.”

Given the Franchise Tax Board’s apparent zeal to close loopholes in taxing trusts, one would expect the New Yorker article and Sonn’s lawsuit would generate an investigation of Getty family activities. We’ll see if it does.

Dan Walters is a journalist and author who writes for CALmatters.org, a nonprofit, nonpartisan media venture explaining California policies and politics. Folsom Times is an approved CalMatters media partner.