Changes to the Hawaii Estate and Generation-Skipping Transfer Tax Law
The Hawaii State Legislature has been quite active in the field of estate planning recently. Last month I wrote an article about the new Power of Attorney law. Shortly after that law was passed, Governor Abercrombie signed Senate Bill 2887, S.D. 1, on April 23rd, which amends the Hawaii Estate and Generation-Skipping Transfer Tax.
This law has a long and convoluted history. I won’t subject you to all of that now, but in short, Hawaii had no estate tax from 2005 to 2010. After April 30, 2010, anyone dying with assets in Hawaii had to pay Hawaii’s Estate and Generation Skipping-Transfer Tax in addition to the Federal Taxes. As it was originally written, the Hawaii Estate Tax Law was poorly drafted, ambiguous, and unclear. Perhaps some of that ambiguity was intentional to obscure the true purpose and function of the law, in order to make it easier to get passed.
On July 25, 2012, Governor Abercrombie signed into law the Estate and Generation Skipping Tax Reform Law to fix some of the problems with the 2010 law. This made the exemption from Hawaii Estate Tax match the Federal Estate Tax exemption. (If you are interested in learning more about the history of Hawaii’s Estate Tax Law, you can read our July 2012 article written by my father, Sanford Okura).
Although Hawaii created its own estate tax in 2010, and then in 2012 matched the $5,000,000 (adjusted each year for inflation) federal exemption from tax, it had not imposed a Hawaii State Gift Tax. The 2012 Hawaii Estate Tax law also did not reduce the Hawaii $5,000,000 estate tax exemption on account of any gifts that were made during the taxpayer’s lifetime, in the way that the Federal law does. This left a big loophole open for estate planning attorneys to help their clients legally save on estate taxes.
I had an elderly client who came to see me last fall with quite a large estate. He had neglected to do any serious estate planning to reduce his potential estate taxes up to that point and was worried he might not have much longer to live. We estimated that without further planning, his Federal and Hawaii estate tax liability was likely to be more than $7 million! We were able to implement some creative planning techniques to legally reduce his estimated estate tax liability by several million dollars.
One of the techniques we used was to have our client give away large amounts of his assets to his children (or to trusts for them) before he passed away. Although the Federal Law reduces your Estate Tax Exemption by any gifts you have made during your lifetime so that giving away assets doesn’t necessarily reduce your Federal Estate Tax, the Hawaii Law did not reduce the Hawaii Estate Tax Exemption for lifetime gifts made, so everything he gave to his children reduced his Hawaii Estate Tax. All we had to do was give away ALL of his assets in excess of $5,250,000 (the exempt amount for 2013) before he passed away and his Hawaii Estate Tax would be zero!
Unfortunately for wealthy clients, and fortunately for the Hawaii State Tax Department, the new law passed in April this year partially closes that particular loophole so that any gifts made during your lifetime will not only reduce your Federal Estate Tax Exemption, but it will also reduce the exemption allowed by the State of Hawaii. The intention was that it should increase the estate taxes that the State will be allowed to collect.
However, thankfully there is still no Hawaii State Gift Tax. That’s why I said it only “partially closes” that loophole. So, if a wealthy person were to give away ALL of his or her assets—down to $0—before he died, then he would still owe Federal Gift Tax on all that money, but there would be nothing left in his estate for Hawaii to tax. As always, clever lawyers will come up with new ways to legally help their clients save assets and minimize their taxes, even if the government changes the laws to try to close loopholes.
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