The Federal Estate Tax Exclusion Threshold is at a Historic High
If you are a frequenter of our Frequently Asked Questions page, you are aware that one of the planning considerations in every estate plan is maximizing payments to the beneficiaries by minimizing the estate taxes. And, most folks with a basic knowledge of estate planning are aware that the current federal estate tax exclusion threshold is high enough that less than a percentage of the population passing in the next few years will be subject to this tax. What most are not aware of is that many of the individual states also levy an estate tax for their coffers. Twelve states and the District of Columbia, in fact, currently impose estate taxes and six impose inheritance taxes.
The State of Hawai’i Levies an Estate Tax
If you live in Hawai’i, (as many of our clients do), you may be aware that the Hawai’i estate tax is among the highest, with a top bracket of 20%. If you were not aware of this and have not planned for it, and your taxable estate exceeds $5.49 million, you will be paying estate taxes starting at 10% and capping out at 20%.
The State of California Does Not Currently Levy an Estate Tax
If you live in California, (as many of our clients do), you may be aware that California does not currently have an estate or inheritance tax. But you may not be aware that if you own property in Hawai’i (as many of our clients do), you may be paying Hawai’i estate taxes on that property.
Non-Resident of Hawai’i Must Pay Hawaiian Estate Taxes
If you have assets in Hawaii, you are subject to Hawaiian estate taxes, even if you are not a resident of the state. As referenced above, Hawaiian residents receive an exclusion on the first $5.49 million of their taxable estates. Non-residents property owners are also subject to this tax, even if you place this property in a Trust.
How it Works
Hawai’i allows for a proportional exclusion based upon your total federal gross estate. So, say you own a $2.5 million vacation home in Hawai’i. You are a resident of another state and your total taxable estate is $10 million. Your total estate is below the current federal exclusion threshold, so no federal estate taxes. If you reside in and the remainder of your assets are in California, no state level estate taxes in California either. But, because your Hawaii property is one-fourth of your total estate, you are taxed proportionally. You are allowed to use one-fourth of the total Hawaiian exclusion, which would equal $ 1,275,300.00 ($5.49M x .25). This reduces your Hawaii taxable estate to $1,127,500.00. You now owe the state of Hawaii $112,750.00. You might not have been expecting that.
What Qualifies as Taxable Property In Hawai’i
If you own a home in Hawai’i, you might have a car or two there as well. Probably furniture, and other taxable property as well. A beneficial interest in a land trust, and shares in a Hawaiian corporation are other common assets. It can add up quickly.
Takeaway
Even if you are willing to assume that federal estate taxes exclusion thresholds will remain at historic highs, if you live in or own property in a state that levies an estate tax, estate tax planning should remain part of your plan. Need help creating your plan? Let me help you find a plan with the flexibility to fit your goals. Not sure if your current plan meets your needs? Whether Legacy or Business Planning, Contact CASHMAN LAW today for a free consultation and get the Plan You Deserve.™
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