HAWAII ESTATE AND GENERATION SKIPPING TRANSFER TAXES
On July 5, 2012, Governor Abercrombie finally signed into law the Estate and Generation-Skipping Tax Reform Act, which is Act 220. Parts of this law were badly needed to clean up the poorly written Hawaii Estate Tax law which became effective in 2010.
The law applies to deaths and taxable transfers occurring after January 25, 2012. It provides for both an estate tax and a generation skipping tax. The intent of the law is to have the Hawaii law follow the federal law as closely as possible, with a few exceptions.
The applicable exclusion amount (the amount exempt from estate tax) is the same as the federal applicable exclusion amount, without reduction for taxable gifts. The federal applicable exclusion amount this year is $5,120,000, and drops to $1,000,000 in 2013. The Hawaii estate tax rate starts at 10% for a net taxable estate of $1,000,000 or less, and increases for larger estates. It goes up to $600,000 plus 15.7% on the excess of a net taxable estate over $5,000,000.
The Hawaii law also includes a generation skipping transfer tax. Generally, the generation skipping transfer tax applies when a transfer is made to a person two or more generations below the donor. This tax is in addition to the estate tax, on transferred property located in the State of Hawaii and transferred property from a resident trust. In 2013, the federal generation skipping transfer tax is scheduled to be a flat 55% of the value of the property transferred in excess of the exemption amount. Because of the very high rate of taxation, we almost always plan to avoid the generation skipping transfer tax. With proper estate planning, there should be no generation skipping transfer tax to worry about either on the federal or state level.
Let me review the history of the Hawaii Estate Tax. Back in 1983, Hawaii adopted The Estate and Transfer Tax Reform Act of 1983. When this law was adopted, the Hawaii death tax, which used to be an “inheritance tax” payable by the beneficiaries, became an estate tax, payable by the estate of the person who died. Hawaii’s estate tax was called a “pick-up tax.” It allowed the State of Hawaii to pick up 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. From 2005, there was no Hawaii death tax, until 2010. On April 25, 2012, then Governor Lingle wisely vetoed the proposed Hawaii Estate Tax law. The law was so poorly written that it was ambiguous. Nevertheless, the Hawaii legislature overrode Governor Lingle’s veto, and the law became effective on April 30, 2010. It imposed a Hawaii estate tax on the estates of persons dying after April 30, 2010.
On December 17, 2010, President Obama signed into law the 2010 Tax Relief Act. This new federal law provided that $5,000,000 would be exempt from federal estate taxes. The Hawaii Tax Department was telling people that even though $5,000,000 is exempt under the federal law, only $3,500,000 is exempt under the Hawaii Estate Tax law. However, as I carefully studied the Hawaii law, I concluded that the law was ambiguous, and that it was unclear whether the exemption from the Hawaii estate tax should be $3,500,000 or $5,000,000.
The Hawaii legislature realized that the Hawaii Estate Tax law needed to be cleaned up, and this new law is the result.
© OKURA & ASSOCIATES, 2012