Hawaii planned to tie its estate tax exemption to the federal estate tax exemption, however after the federal exemption rose to over $11 million, Hawaii decided to keep its exemption separate. So Hawaiians who die in 2019 can leave up to $5.49 million without owing state estate tax. Estates over that amount will be taxed by Hawaii, and estates over $11.4 million will also be taxed by the federal government.
For deaths in 2019, a Hawaii estate tax report must be filed if the gross estate of a Hawaii resident had a value of more than $5.49 million.
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 $5.49 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:
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.
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 $5.49 million, then no tax will be due.
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 does not use any exemption (say, because everything went to the surviving spouse under the marital deduction), then the second spouse to die will be able to use two $5.49 million exemptions -- that's nearly $11 million without owing estate taxes to Hawaii. 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 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.