If you live in Hawaii and leave behind more than $5.49 million (for deaths occurring in 2021), your estate might have to pay the Hawaii estate tax. The Hawaii estate tax is separate from the federal estate tax, which is imposed only on estates worth more than $11.7 million (for deaths in 2021). So even if your estate isn't large enough to owe federal estate tax, it might still owe Hawaii estate tax.
But it's not just Hawaii residents who might owe Hawaii estate tax. If you're a nonresident but own real estate or other assets—such as a vacation home or a boat—located in Hawaii, your estate will also need to consider Hawaii estate tax rules.
If you die while a resident of Hawaii, the personal representative or executor of your estate will need to file the Hawaii estate tax return and pay the state estate tax if your "taxable estate" adds up to more than $5.49 million. Although the process can get quite complicated, the taxable estate is generally calculated by determining your "gross estate" and then subtracting available deductions.
The gross estate will include just about all of the property you leave behind, such as:
Co-owned property. If you own assets with someone else, generally only your share will be included in your estate. In other words, if you and your spouse own your house, half of its value would be included in your estate.
Nonprobate assets. Notably, your gross estate also includes non-probate assets. For example, the property you hold in a revocable living trust avoids probate, but it does not avoid estate taxes, and is counted in your gross estate.
Nonresidents. If you're not a resident of Hawaii but own real estate or tangible property located in Hawaii, your estate might owe Hawaii estate tax. A ratio (essentially the value of your property that is located in Hawaii to the total value of your gross estate) is used to determine the tax your estate owes.
From the gross estate, your estate will subtract any available deductions to arrive at the taxable estate. If the deductions lower your taxable estate below $5.49 million, no estate tax will be due. These deductions include:
If your estate owes estate tax, how much will it actually owe? In Hawaii, the first $5.49 million of the estate is not taxed. On the portion that exceeds $5.49 million, the estate tax rate ranges from 10% to 20%. (Compare these rates to the current federal estate tax rate of 40%.) To calculate the exact amount of tax owed, see the table at the end of the Instructions for Form M-6.
Hawaii, like the federal government, allows a surviving spouse to use the unused portion of a deceased spouse's estate tax exemption. This is referred to as the "portability" of the exemption. For example, if the first spouse to die does not use any of the 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 return and pay any tax due nine months after the date of death. The state may grant a six-month extension to file the return itself, but this extension doesn't give the executor extra time to pay the estimated tax. If the estimated tax is not paid on time, interest starts to accrue on the unpaid tax.
If your estate owes Hawaii estate tax but not federal estate tax (that is, if you fall between the state and federal exemption amounts), your executor will still have to attach a version of the federal estate tax return with the Hawaii estate tax return; this federal return is not actually filed with the federal government, but is used by Hawaii as supporting documentation.
Your executor will likely have to hire professional help (an experienced lawyer or CPA) to prepare the Hawaii estate tax return. The estate's funds can be used to pay for professional fees. For background information and tax forms, see the Hawaii Department of Taxation website.