The Hawai‘i state Legislature has been quite active in the field of estate planning recently. Last month, I wrote about the new Power of Attorney Law. On April 23, Gov. Neil Abercrombie signed Senate Bill 2887, S.D. 1, which amends the Hawai‘i Estate and Generation-Skipping Transfer Tax.
This law has a long and convoluted history. I won’t subject you to all of it now, but in short, Hawai‘i had no estate tax from 2005 to 2010. After April 30, 2010, anyone who died with assets in Hawai‘i had to pay Hawai‘i’s Estate and Generation-Skipping Transfer Tax, in addition to federal taxes. The originally written Hawai‘i Estate Tax Law was poorly drafted, ambiguous, and unclear. Some of that ambiguity may have been intentional to obscure the true purpose and function of the law in order to make it easier to pass.
On July 25, 2012, Gov. Abercrombie signed the Estate and Generation-Skipping Tax Reform Law, which fixes some of the problems with the 2010 law. This made the exemption from the Hawai‘i estate tax match the federal estate tax exemption. (If you are interested in learning more about the history of Hawai‘i’s Estate Tax Law, you can read the July 2012 column that was written by my father, Sanford Okura).
Although Hawai‘i created its own estate tax in 2010, and then in 2012 matched the $5 million (adjusted each year for inflation) federal exemption from tax, it had not imposed a state gift tax. The 2012 Hawai‘i Estate Tax Law also did not reduce the Hawai‘i $5 million 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 legally help their clients save on estate taxes.
An elderly client came to see me last fall with quite a large estate. He hadn’t done 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 Hawai‘i 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 him 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 Hawai‘i law did not reduce the Hawai‘i estate tax exemption for lifetime gifts made, so everything he gave to his children reduced his Hawai‘i 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 Hawai‘i estate tax would be zero!
Unfortunately for wealthy clients, and fortunately for the Hawai‘i State Department of Taxation, the new law passed in April of 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 will also reduce the exemption allowed by the state of Hawai‘i. The intention was that it should increase the estate taxes that the state will be allowed to collect.
Thankfully, however, there is still no Hawai‘i state gift tax, which is 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 a federal gift tax on all that money, but there would be nothing left in his estate for Hawai‘i 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.
© OKURA & ASSOCIATES, 2014
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Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and asset protection.
This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.