After doing away with its estate tax, Hawaii brought back the tax, and it now applies to estates that have a total value of more than $5.45 million.
Will Your Estate Have to File a Return?
For deaths in 2016, a Hawaii estate tax report must be filed if the gross estate of a Hawaii resident had a value of more than $5.45 million. This exempt amount is the same as the amount that is exempt from federal estate tax.
Even if a return is required, however, it doesn’t mean the estate will owe Hawaii tax. Some expenses can be subtracted from the gross estate, and some property—most important, property left to the surviving spouse—is not subject to tax.
If you’re not a resident of Hawaii but own valuable property there, your estate may owe Hawaii estate tax. Assets that are physically in the state are taxed. For example, if you own real estate in Hawaii or have a boat or plane there, your estate may need to file a Hawaii estate tax return.
An estate is taxable in Hawaii if the amount of the taxable estate, as calculated on the federal estate tax form (IRS Form 706, line 3a) is more than $5.45 million). To determine whether or not a Hawaii estate tax return is required, your executor will start by calculating the value of your gross estate. It will include the value of:
- Real estate
- Bank accounts, certificates of deposit
- Stocks and bonds
- Personal property items
- Life insurance proceeds (unless you didn’t own the policy)
- Funds in your retirement accounts
- Your small business interests (whether the company was a sole proprietorship, limited liability company, or small corporation)
When it comes to jointly owned assets, just the value of your half (or other share) is included in your gross estate. For example, if you and your spouse own a house in Hawaii, half of its value would be included in your gross estate at your death.
Any assets you hold in a revocable living trust will be included in your gross estate for tax purposes. The taxing authorities don’t care whether or not property goes through probate; they just care about what you owned at your death.
Your Taxable Estate
Even if you leave an estate that’s big enough to require an estate tax return, the estate might not owe tax. Property left to your surviving spouse or to your civil union partner is exempt from state estate tax, no matter what the amount. So if you leave a large estate, it may trigger the requirement to file a return, but if everything goes to your spouse, or other deductions reduce the value of your taxable estate below $5.45 million, then no tax will be due.
Portability: An Estate Tax Break for Spouses
Hawaii, like the federal government, allows a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption. This rule is called "portability" of the exemption. For example, if the first spouse to die uses only $1 million of his estate tax exemption, his surviving spouse could use the rest. To take advantage of this provision, however, state and federal estate tax returns must be filed at the death of the first spouse to die.
The Executor’s Job
The executor must file the Hawaii estate tax report (if one is required) and pay any tax due nine months after the date of death. The state may grant a six-month extension to file, but it doesn’t extend the time to pay the estimated tax. If it’s not paid on time, interest starts to accrue on the unpaid tax.
The top state tax rate is 16%.
Preparing a federal estate tax return or Hawaii estate tax report (Form M-6) requires the help of an experienced lawyer or CPA. Both state and federal forms are complicated and confusing. For background information and tax forms, see the Hawaii Department of Taxation website.