Tag Archive for 'estate tax'

The New Hawaii Estate Tax (June 2010)

Published
by
Sanford Okura
on June 26, 2010
in Estate Taxes and Gift Taxes
. 9 Comments Tags: , , .

There is now a new Hawaii estate tax.  The bill proposing the tax (House Bill 2866) was vetoed by Governor Lingle on April 25, 2010.  The Hawaii legislature overrode the veto on April 29, 2010, and the bill became Act 74 on April 30, 2010.  It imposes a tax on the estates of persons dying after April 30, 2010.

Let me first explain the history of the Hawaii inheritance tax and the Hawaii estate tax.  An estate tax is a tax on the property of someone who has died.  The federal death tax is an estate tax. An inheritance tax is a tax on property that is inherited by each beneficiary or heir.  When I first became an attorney in 1976, there was a Hawaii inheritance tax.  I remember preparing Hawaii inheritance tax returns.  Then Hawaii adopted The Estate and Transfer Tax Reform Act of 1983.  When this law was adopted, the Hawaii death tax became an estate tax.  Hawaii’s estate tax was called a “pick-up tax.”  It allowed the State of Hawaii to pick up (or collect) for itself part of the estate tax which the federal government could collect.  The amount that Hawaii could collect was the maximum amount that the federal government allowed as a credit for state death taxes against the federal estate tax.  Later, the federal government passed the Economic Growth and Tax Reconciliation Act of 2001.    This tax act phased out the state death tax credit at the rate of 25% a year starting in 2002.  This meant that the amount of the federal death tax which Hawaii got to keep was reduced each year, until it became zero.  Since 2005, there has been no Hawaii death tax, until now.

The new Hawaii estate tax law is poorly written.  It would be difficult for someone to understand the new law without doing some tax research and without knowing the history of the federal estate tax and the Hawaii estate tax.  When you first read the new law, it sounds like the tax only affects nonresidents who are not citizens of the United States.  After researching the federal and state tax laws referred to, you realize that the new law affects Hawaii residents and citizens as well.

It appears that under the new law, there will be no Hawaii estate tax to pay unless you die with a taxable estate of more than $3,600,000.  Although the new law allows a $3,500,000 tax free amount, when you actually calculate the tax, another $100,000 is tax free, for a total of $3,600,000.   For the first $50,000 over $3,600,000, the tax rate is only .8%.  For those who die with a taxable estate of more than $10,100,000 the tax rate goes as high as 16%.

If a married person with an A-B trust with more than $3,600,000 dies in 2010, since there is no federal estate tax this year, the entire estate would go into the B trust, and nothing would go into the A trust (the marital trust). Everything going into the B trust in excess of $3,600,000 would be subject to the new Hawaii estate tax.  Some or all of that tax could be avoided by changing the trust to cause some assets to go into the A trust.  In 2011 or later years, under current law only $1,000,000 will be exempt from the federal estate tax but $3,600,000 will be exempt from the Hawaii estate tax.  Depending on the size of the estate, there may be tax savings by arranging the estate plan so that some tax is paid when the first spouse dies, instead of deferring all taxes until the second spouse dies.   Anyone with assets large enough to be taxed should have their estate plan reviewed to see if any changes are warranted as a result of the new Hawaii estate tax or the reduction in 2011 of the federal tax free amount to only $1,000,000.



The Stepped Up Basis (October 2009)

Published
by
Sanford Okura
on October 14, 2009
in Estate Planning
. 0 Comments Tags: , , , .

In estate planning, it is important to understand “stepped up basis.”  When you buy property (for example, real estate or stocks) your “tax basis” in the property is the amount you pay for the property.  When you sell the property, you have profit or “gain” equal to the difference between the sale price and tax basis.  You have to pay “capital gains taxes” on your gain.

For example, suppose you bought a vacant lot many years ago for $10,000.  Now, that same land is worth $110,000.  If you sell that land for $110,000, your gain is $100,000 ($110,000 minus $10,000).  You have to pay capital gains taxes on that gain.  The federal capital gains tax rate for property held more than one year is generally 15%.  The State of Hawaii rate is 7.25%.  You would have to pay $22,250 in taxes.  (If you itemize deductions, you can take a deduction the following year on your federal income tax return for the state taxes paid.)

Instead of selling that land, suppose you give it to your son.  Your son’s tax basis in the land is $10,000.  When he sells that land for $110,000, he will have to pay the capital gains tax of $22,250.

Now, here is the tax planning opportunity.  Suppose after you bought that land for $10,000, you did not sell it and you did not give it to your son.  Instead, you hold on to the land until you die.  Your son inherits the land from you.  Then he sells it for $110,000.  He does not have to pay any capital gains taxes at all!  When you die owning that land, the tax basis in that land changes or “steps up” from $10,000 to $110,000 (the fair market value on the date of death.)  It is as if your son bought the property from you for $110,000.  When he sells it for $110,000, his gain is zero ($110,000 sale price minus $110,000 tax basis equals zero).  Therefore, his tax is zero.  Your son saves $22,250 in taxes by inheriting property from you instead of getting it from you while you are still alive.

This stepped up basis rule also applies to stocks, your home, and rental property.  (With rental property, the tax basis goes down every year as you depreciate the property.)  It does not apply to annuities or IRAs.  Here is another exception.  If you give property to someone, and that person dies within one year, and you or your spouse inherits that same property from that person, then you do not get a stepped up basis.

One of the best ways to get a stepped up basis for your home is to give it to your children, but keep a “life estate.”  You have given the home away, and protected it from nursing home costs, but you have the right to live there for the rest of your life.  When you die, because you kept the right to live there, the property gets a stepped up basis.  Your children could then sell it for the date of death value without paying any taxes.  (However, there is no stepped up basis if a person dies with a life estate in the year 2010.)  Our law firm has developed other techniques for getting a stepped up basis in other kinds of property such as rental property and stocks.

In 2009, a person can die with up to $3.5 million without paying any death taxes.  For many people, death taxes are no longer a problem.  We need to be paying more attention to capital gains taxes which our children or other loved ones may have to pay if they sell property we give to them.  Before you give away any real estate or stocks that have gone up or down in value, check with an estate planning specialist as to how the tax basis rules will affect your gift.

© OKURA & ASSOCIATES, 2009



Proposed New Laws

Published
by
Sanford Okura
on April 29, 2009
in Estate Taxes and Gift Taxes
. 4 Comments Tags: , , , .

PROPOSED NEW LAWS

There are some proposed new rules and laws which would affect estate planning.  First, let’s review the current estate tax law.  The estate tax is a federal tax.  At this time there is no Hawaii estate tax or inheritance tax.  As a result of the 2001 tax act, the current estate tax law is very strange.  A person can die in 2009 with up to $3,500,000 of assets without any estate tax.  For amounts over $3,500,000, the estate tax rate is 45%.  In 2010 there is no estate tax at all.  Bill Gates could die in 2010 with 50 billion dollars of assets and pay no death tax!  In 2011 a person can die with only $1,000,000 tax free.  For amounts over $1,000,000, the estate tax rate starts at 41% and goes up to 55% for amounts over $3,000,000.

This strange law was created by Congress in 2001.  At that time, a person could die with $1,000,000 of assets tax free.  The 2001 tax act pretended to get rid of the estate tax.  It gradually increased the amount of assets with which a person could die tax free.  The tax free amount was increased to $1,500,000 for persons dying in 2004 and 2005, $2,000,000 for 2006 through 2008, $3,500,000 for 2009, and then in 2010, there would be no estate tax at all.  However, the bill that passed Congress had a “sunset clause.”  It provided that unless Congress acted to extend the law, this new law would disappear at midnight on December 31, 2010, and on January 1, 2011, we would return to the law which was in effect in 2001 before the 2001 tax act was passed.  Some of the nation’s top estate and gift tax scholars believe that Congress never did intend to get rid of the estate tax.  Congress just pretended they would get rid of the tax, to win political points.

At the end of March 2009, Senate Finance Committee Chairman Max Baucus (D- Montana) made an important announcement.  He announced proposed legislation to be called “The Taxpayer Certainty and Relief Act of 2009.”  The word “certainty” in the title is to reassure the public that we will finally know for certain what the estate tax law is going to be.  The major proposal of the bill is to make permanent the 2009 estate tax, gift tax and generation skipping tax laws.  This means that the bill proposes to keep $3,500,000 as the amount exempt from estate taxes in 2010, 2011 and beyond.  The bill also proposes to index the amount of exemption for inflation.  This means that the amount exempt from estate taxes would increase as the cost of living goes up.  The bill proposes other changes, both in estate tax laws and in income tax laws.  After the details of the proposal are available, I will give you a more complete report on this important bill.  I believe there is a very high probability that Congress will pass changes to the estate tax laws this year.  The reason I believe this is that I don’t think they would want wealthy people to die in 2010 without being taxed.

The Deficit Reduction Act of 2005 was the most sweeping change in 13 years of laws relating to Medicaid for nursing homes.  It was signed into law by President Bush on February 8, 2006.  The State of Hawaii is so slow in implementing it that the new law is still not being followed in Hawaii.  On March 23, 2009, the Department of Human Services finally held a public hearing on proposed changes to the Hawaii Administrative Rules based on the Deficit Reduction Act.  However, when I read the proposed rules, I did not find any rules showing the most important changes made by the federal law.  Therefore, until further notice, we can still get nursing home residents qualified for Medicaid under the less strict older law, which is still being followed in Hawaii.

 

© OKURA & ASSOCIATES, 2009

 



© Okura & Associates, 2008