Hawaii Estate Tax: The Ultimate Guide [Rates & Exemptions]

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Paul Sundin, CPA

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Hawaii is a beautiful state that has received substantial increases in migration in recent years. People in the country have been leaving busy cities and migrating to more peaceful communities.

But Hawaii is known as not the most tax friendly state. In this post, we take a look at the Hawaii estate tax, gift tax and inheritance tax. We will break down how it works and give you some tips and tricks along the way. Let’s jump in.

Hawaii Estate Tax Exemption & Rates

Unfortunately, Hawaii does have an estate tax. The estate tax is progressive, which means that the rates will increase as the estate size increases. The rates start at 10% and go to 20%. On January 1, 2020, Hawaii increased the tax rate on estates valued at over $10 million to 20%.

The following table summarizes the Hawaii estate tax:

IssueAmount or Percent
Exemption amount$5.49 million
Beginning tax rate10%
Top tax rate20%

The estate tax exemption amount in Hawaii is $5.49 million. That number may go up or down in future years depending on legislation.

So if your estate is below the $5.49 million threshold, you don’t currently have to worry about a state level assessment. But you still have to be concerned at the federal level because there is an immediate threat of higher tax rates and a lower estate tax exemption.

How does the federal estate tax work?

In theory, the federal state tax is pretty easy to understand. But the details can be very confusing and challenging when put into practice.

When a person passes away, the executor must summarize all of the decedents assets. An evaluation must be completed on farms, real estate and other collectibles. Stocks, bonds and investment accounts will typically have fair value custodian statements.

Once assets are determined, the executor should summarize all the liabilities of the person who passed away. This would include mortgages, credit cards, medical bills, and any other estate liabilities.

The estate can then be reduced for miscellaneous costs to administer the estate, legal and accounting fees, and funeral related costs.

While less than half of 1% of Americans will be assessed and estate tax, the rate is as high as 40%. So even if your assets are well below the exemption level, they may increase overtime and you may find that you have a significant estate tax problem.

Does Hawaii have an inheritance tax?

The good news is that Hawaii does not assess and inheritance tax. So if someone passes away who lived in the state or if someone lives in the state and receives an inheritance from another state, no tax is assessed.

In fact, only a handful of states have an inheritance tax. It is very difficult for states to review and assess. States are getting more and more aggressive and we might find more states with inheritance tax laws in the near future.

Does Hawaii have a gift tax?

Hawaii does not have an assessment for a gift tax. Don’t forget that the federal gift tax has a $15,000 exemption per recipient and per person for each year. Your lifetime gift tax exemption is the same as your federal estate tax exemption.

Hawaii estate tax portability

Just like the federal estate tax exemption, Hawaii’s estate tax is portable. This means that when a person passes away they can pass along any unused exemption to their spouse. This will allow a married couple to protect an estate that is upwards of $11 million when they both pass away.

Hawaii tax structure

Hawaii’s overall tax situation might not be the best. While the state does not tax Social Security or pension income, it does tax distributions from retirement plans like IRAs and 401(k)s.

Hawaii’s tax rates range from around 1% to 8%. The good news is that property taxes in Hawaii are some of the lowest in the country. They have an overall effective rate of around .2% to .3%.

However, with such high home values on the islands the overall property taxes paid might be comparable to what you would see in the mainland.

Hawaii doesn’t actually have a sales tax, but it does have a general excise tax that is charged to businesses. They will often pass this on to consumers. The rate is 4% for the entire state.

The Hawaii estate tax is a progressive tax that applies to estates valued at over $5.49 million. This means that if your estate is worth more than $510,00, the state will assess 12% of the value of the estate. In other words, if your estate is worth $510,00, the state will levy a $271,200 tax, which is more than the federal estate taxes. For a couple with no assets, the estate can avoid the Hawaii inheritance tax if the couple is married and have no children.

The current estate tax rate in Hawaii is 18 percent on taxable assets worth more than $5.49 million. From December 31, 2016, this rate will decrease to 15%, or $25,000 for married couples. There is no inheritance tax for heirs under 21 years old.

However, if you pass away in 2023 or later, your heirs will be subject to income tax on your property. So, if you pass away before the estate tax is enacted, you will want to prepare accordingly.

To avoid Hawaii estate tax, set up an irrevocable life insurance trust to pay for the taxes. You can use this trust to pay your tax. An irrevocable life insurance trust will not count as part of your estate, so it will bypass probate.

Another benefit is that your heirs will not have to deal with the probate process. This allows you to transfer money without worrying about Hawaii inheritance tax. This is a great option for those concerned about the taxes.

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Estate CPA

Gilbert, AZ