When we implement planning strategies with our Hawaiian clients, a question often comes up about the Hawaii gift tax. Have this discussion as part of an estate review.
If you are a Hawaii resident and are thinking about estate planning, this post will detail how the gift tax works and consider some of the rules and requirements. Let’s get started.
Table of contents
What is the gift tax?
What is a “gift” in the eyes of the federal government? A gift is when a person gives another person something of value. The person who made the gift then receives either nothing back or something of less value.
The gift tax is an IRS tax levied when a gift is made over the annual exemption. Gifts are typically made with cash, but they can also be made with property, such as stocks, collectibles, business holdings, real estate, cars, boats, and mutual funds.
What is the Hawaii Gift Tax?
So here comes the good news – Hawaii does not have a gift tax. In fact, most states do not levy a gift tax. So this really should not be much of a surprise.
But don’t feel too comfortable. The federal gift tax is still in place and must be considered.
How does the federal gift tax work?
The federal gift tax rules allow anyone to give away $15,000 to another person each year. This gift (or financial transfer) can be made to any number of people without requiring the filing of a gift tax return. It will also not count against the person’s lifetime exemption amount.
For example, a couple with one child can give away $15,000 to the child. If the child is married, they can make the same gift amount to the son-in-law or daughter-in-law. If structured correctly, the couple would be able to gift away a substantial portion of their estate relatively easily (depending on the estate size).
Form 709: Gift Tax Return Laws
Form 709 is the gift tax return. It must be filed when gifts are made above the annual exclusion.
As an example, let’s assume you make a gift of $35,000 to your sister. Since the amount is over the annual exclusion, the IRS calls it a taxable gift. The following holds true:
- Form 709 must be filed to reflect the $20,000 gift that exceeded the annual exemption.
- No gift tax is assessed unless the amount is above the lifetime exemption.
How to Legally Avoid the Hawaii Gift Tax
Since Hawaii does not have a gift tax, you are in good shape. But the federal gift tax could still catch you. There are planning strategies that you can implement to minimize any estate tax issues. Make sure you consider the following:
- Special Valuation of Farms and Businesses
- Family Limited Partnerships (FLPs)
- Charitable Remainder Trusts
- Grantor Retained Income Trusts
- Qualified Personal Residence Trusts (QPRTs)
- Grantor Retained Annuity Trusts (GRATs)
- Crummey Trusts
- Minor Trusts
- Grantor Retained Unitrusts (GRUTs)
Takeaway
You should have a general understanding of the federal gift tax. Even though it will only impact less than 1% of Hawaii taxpayers, high-income earners should take careful notice.
Annual gifts are typically the first estate planning tool. Examine your estate closely and have a comprehensive discussion with your accountant and attorney about lowering your estate before it is too late.
