Many people set up estate plans because they are concerned with having to pay estate or “death” taxes. Currently, if someone dies in 2020, their estate is taxed by the Federal government for every dollar their estate is over $11,580,000. California does not currently impose any estate taxes. But what happens if you own property in another state? What if you have a vacation home or condo in Hawaii?
In Hawaii, if you own real property you are subject to Hawaiian estate taxes on your death, even if you are not a resident of the state. In 2019, Hawaii revised their estate tax statutes and decoupled their estate tax amounts from the Federal amounts. Instead, Hawaiian residents receive a $5,490,000 exclusion amount before their estates are taxed. Non-residents are allowed to use a portion of that exclusion amount that is proportional to their Hawaiian estate versus their Federal gross estate. For example: David owns a $3,000,000 home in Hawaii. He is a resident of California and owns a $9,000,000 estate: $6,000,000 in California and $3,000,000 in Hawaii. If David dies in 2020, his estate will not owe federal estate taxes, and California does not have estate taxes, but he will owe Hawaii taxes.
Because his Hawaii property constitutes one-third of his total estate, he will be allowed to use one-third of the Hawaiian exclusion amount of $5,490,000, which is $1,830,000. This reduces his taxable estate in Hawaii from $3,000,000 to $1,170,000. The taxes owed on $1,170,000 will be $118,700.
Taxable property in Hawaii includes: real property located in Hawaii; any tangible personal property having a situs in Hawaii, such as a car, and including for example, a beneficial interest in a land trust that owns real property in Hawaii; intangible property having situs in Hawaii, including shares of stock if issued by a Hawaii corporation.
It is important to note, that holding property in a trust does not avoid Hawaii’s estate taxes. One way to assist your loved ones with this estate tax is by using an Irrevocable Life Insurance Trust (ILIT), which can own life insurance policies without increasing your taxable estate and the proceeds can be used to pay Hawaii’s estate tax. This might be something to consider if you have a family vacation home in Hawaii and you do not want your family to have to sell it in order to pay the estate taxes.
Often, we think about reviewing our estate plans when Federal tax laws change or our resident state’s laws change, but it is smart to review other states’ tax laws if you own property in that state. With the increase in the Federal exemption amount, other states are trying to close the gap and collect taxes for themselves by changing their laws. If you own any property in another state, it might be time to review your estate plan.