Last Updated on April 21, 2024
If you have a significant amount of assets that you want to pass on to heirs and are a Hawaii resident, you may wonder how much your heirs will lose to the estate tax. Unfortunately, estate tax laws can be complex and vary from state to state. Therefore, understanding how these apply to your location and impact your estate is crucial.
In this article, we’ll dig the basics of the estate tax and walk through different tactical approaches you can take to maximize your hard-earned gains you pass onto future generations:
- Use trusts:
- Pass money to next generations free of estate tax and without using your lifetime gift exemption with a Grantor Retained Annuity Trust (GRAT) or combine GRATs with direct indexing to maximize the GRAT’s volatility and increase returns by even 98% or more.
- Gift assets into a trust, your spouse (and in practice, you) can access the assets during your lifetime, and any other appreciation will pass to your kids and future descendants free of estate tax with an Intentionally Defective Grantor Trust (IDGT)
- Preserve your wealth, reduce or avoid estate taxes, and ensure that assets are managed and distributed according to their wishes over multiple generations with a Dynasty Trust.
- Utilize gifting before your death: you can take advantage of your annual and lifetime gift exemptions to reduce your estate’s taxable value
- Invest in life insurance: it can be used to pay estate taxes, is generally exempt from income tax, and can be structured to avoid the estate tax by being put in an Irrevocable Life Insurance Trust (ILIT) or setting up Private Placement Life Insurance (PPLI) to avoid income and estate taxes.
But first, let’s start with the basics of what the estate tax is and what’s the difference between state and federal estate taxes.
So, let’s dive in!
What is the Estate Tax?
Before diving into the state-specific Hawaii estate tax and how it works, let’s get into the estate tax basics.
The estate tax is a tax on the transfer of assets between generations, i.e., from parents to their heirs. It is imposed on the estate’s total value and any gifts made before the person passes away above a person’s exemption amount. In 2024, that exemption amount is $13.61 million, up from the 2023 exemption amount of $12.92 million.
These taxes are intended to reduce the wealth concentration by taxing inherited wealth. Still, they can be minimized or completely avoided throughestate-tax planning. But how?
Estate-Tax Planning Overview
Estate-tax planning comes into play when you want to pass assets to the next generation. With estate-tax planning, you can arrange your affairs to reduce the amount of federal and state estate taxes you and your heirs will face and maximize how much you pass on to the next generation.
Importantly, estate-tax planning can significantly impact how much you pass on to heirs because of how high federal and state estate taxes are.
Need some help to understand the most convenient tax planning structure to reduce your estate taxes? Our team of tax-planning experts can help!
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Federal Estate Tax
The federal estate tax is a tax on assets transferred from a person who passed away to their heirs. It is paid by the dead person’s estate and is due nine months after the person’s death. The federal estate tax rate is 40%. That means that if you are leaving your beneficiaries a $23.61 million estate, the estate will owe $4,000,000 in federal estate taxes. And that’s even before accounting for any state estate tax liability!
What is the Federal Gift and Estate Tax Exemption?
Each individual has a lifetime gift estate tax exemption. This exemption is the value of assets you can give away, throughout your life and after your death, without being subject to federal estate tax.
For 2024, this exemption is $13.61 million per person. Because the exemption is per person, married couples can give away double that amount. In addition, as of 2024, you have an annual gift exclusion which allows you to give up to $18,000 per person/year that doesn’t count towards the gift tax exemption.
However, it’s essential to know the federal estate tax exemption level is scheduled to be reduced by 50% to about $7.2 million when theTax Cuts and Jobs Actsunsets in 2026, which is why it’s essential to get started with estate planning sooner rather than later.
So, how do all of these apply in the state of Hawaii?
Hawaii Estate Tax Exemption
The Hawaii estate tax exemption, like the federal exemption, is a tax exemption that reduces the amount of estate taxes that must be paid. At the state level, the exemption is $5,490,000; in other words, you will pay no Hawaii estate tax on estate transfers up to that value.
Hawaii’s Estate Tax: How much Is It?
Like most U.S. tax rates, the estate tax rate in Hawaii is progressive, based on the estate’s value. In 2022, estates valued at over $5.49 million are subject to estate tax. Estates over $5.49 million are subject to marginal rates between 10% and 20%.
This table gives an overview of the Hawaii estate tax rates based on the size of the taxable estate and shows the minimum taxes paid and the marginal tax rate for each bracket, up to a maximum of 20%.
| Taxable Estate | Minimum Taxes Paid | Marginal Rate |
| $5,490,000 – $6,490,000 | $0 | 10% |
| $6,490,000 – $7,490,000 | $100,000 | 11% |
| $7,490,000 – $8,490,000 | $210,000 | 12% |
| $8,490,000 – $9,490,000 | $330,000 | 13% |
| $9,490,000 – $10,490,000 | $460,000 | 14% |
| $10,490,000 – $15,490,000 | $600,000 | 15.70% |
| Over $15,490,000 | $1,385,000 | 20% |
Hawaii Estate Tax Example
Let’s say your total taxable estate is $8 million. That exceeds the minimum to avoid Hawaii estate taxes. Therefore, all your estate is taxable in Hawaii, this case’s tax will be $271,200. Since $8m is in the $7.49m-$8.49m taxable estate category (column 1) that means there is a minimum estate tax of $210k(column 2) plus 12% of every dollar (column 3) above $7.49m.
However, you can avoid Federal Estate taxes due to the amount of taxable estate (since the minimum to pay Federal estate taxes is $13.61 million). That means a Hawaii resident trying to pass on their $8 million estate would end up passing on $7,728,800 to their children.
Tax planning ideas to reduce your estate taxes in Hawaii
Different tax planning strategies can help you reduce your estate taxes. Here are the four key to consider:
- Use trusts: Establishing a trust can help reduce an estate’s taxable value and the estate taxes due. Three commonly used options are:
- Grantor Retained Annuity Trust (GRAT): More than half of of the 100 wealthiest Americans use GRATs to pass assets on to future generations. With a GRAT, you can place assets into the trust, any appreciation above a set percentage will pass to your beneficiary’s estate tax-free, and you won’t use up any of your lifetime gift exemption. As a result, you can substantially reduce the size of your taxable estate while passing on assets to your heirs. To get even better returns, you can use Valur’s Direct-Indexed GRATs, where instead of buying a single index fund and placing it in a GRAT, you’d follow a direct index strategy and open up separate GRATs that would own each individual stock in the index (an important comment here: the cost of +500 Valur GRATs is comparable to the cost of 1 or 2 GRATs from a traditional service provider!). By doing so, you can take advantage of several features of GRATs to yield far greater returns — 98% higher over the last 20 years. In fact, as a result of the basic rules of GRATs, it’s impossible for the combination of direct indexed GRATs to perform worse than a single GRAT that owns the same stocks via an index fund. Sounds too good to be true? Check out our direct Indexing GRATs case study or set up a call to learn more.
- Intentionally Defective Grantor Trusts (IDGT): With an IDGT, you can gift assets into the trust, your spouse (and, in practice, you) can access the assets during your lifetime, and any appreciation will pass to your kids and future descendants free of the estate tax and critically you can pay the trust taxes without those assets counting as gifts or facing the estate tax. Being able to pay the trust’s income taxes can more than double the amount of assets you pass on to future generations estate tax free. Schedule a call with our professionals to learn more here.
- Dynasty Trusts: Designed to help individuals and families preserve their wealth, reduce or avoid estate taxes, and ensure that assets are managed and distributed according to their wishes over multiple generations. Learn more about Dynasty trusts here or schedule a call with us here.
- Utilize gifting: By gifting assets before death, you can take advantage of your annual and lifetime gift exemptions to reduce your estate’s taxable value and allow future appreciation on your investments to take place outside of your estate and free of the estate tax.
- Use marital deductions: Married couples can use the unlimited marital deduction to transfer assets to a surviving spouse without incurring any estate taxes. The marital deduction is a tax provision that allows an individual to transfer an unlimited amount of assets to a surviving spouse without paying any federal gift or estate taxes. This means that the surviving spouse will not have to pay taxes on the assets they receive. The deduction also applies to property jointly owned by the couple, such as a home. When one spouse dies, the surviving spouse can keep the property without paying taxes. The marital deduction is essential for married couples to reduce the estate taxes they will have to pay.
- Invest in life insurance: Life insurance can be used to pay estate taxes, is generally exempt from income tax, and can be structured to avoid the estate tax by being put in an Irrevocable Life Insurance Trust (ILIT) or using Private Placement Life Insurence (PPLI).
Conclusion
The Federal and Hawaii estate tax can significantly reduce the assets your family receives when you pass away. Fortunately, there are several strategies available to minimize the applicable tax. You can read more here, use our Guided Planner tool to find helpful solutions, or schedule a time to talk with our expert team.
About Valur
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