Understanding Hawaii Estate Tax and Its Effect on Property Transfer

Hawaii is a nice place to visit—but you probably don’t want to die there. The 50th state has high taxes, and those taxes don’t stop at death. Estates of Hawaii residents and those who own property there could be subject to some heavy tax burdens if proper planning isn’t done.

Because Hawaii is such a popular vacation spot, a large portion of its real estate is owned by people who don’t live there. Vacation homes abound, and they’re worth a lot of money. That might seem great while you’re living, but that Hawaiian condo or beachfront property is going to cost your heirs big time.

What You Need to Know About Hawaii’s Estate Taxes

Hawaii’s estate tax exemption follows the federal one at $5.45 million. It’s applicable to all valuable assets owned in the state and to the state’s residents. If you own property with someone else, that property is going to be considered 50% yours—meaning only half of its value will be considered part of your estate.

On the upside, the state allows the same portability as the federal government, so the first spouse to die can leave his or her remaining exemption to his or her spouse, and outright transfers to a spouse aren’t taxable. Estate taxes max out at 16% of your adjusted estate value.

Your estate tax return and any payment is due nine months after the death. While extensions are available, you will be charged interest even if the estate is granted an extension.

The big issue in Hawaii is one that impacts both residents and nonresidents: property value. The median home value in Hawaii is three times higher than the national average. If you own a home there, then it’s a valuable one simply due to supply and demand. On top of that, home values are just going to keep climbing. That means that by the time your heirs inherit that Hawaiian vacation home, they could be looking at a heavy tax burden—one they’ll probably have to sell the property to settle.

Using Life Insurance Trusts to Cover Hawaiian Property Transfer Taxes

If you own property in Hawaii, you’re going to want to create a pool of funding to pay the taxes on that property so your heirs won’t have to sell it. One way is to create an irrevocable life insurance trust (ILIT) and use the property as collateral to finance the premium. This way, you can pay for the policy without having to pay out of pocket—and that policy will be worth several times the premium by the time you pass away.

Here are a few benefits of creating an ILIT and funding it with a financed premium:

  • Your heirs will be able to pay Hawaii estate tax and keep the property with no out-of-pocket costs.
  • The ILIT is not part of your estate and bypasses probate, thus creating a fast, tax-free pool of funding.
  • When you finance the premium, you have no immediate out-of-pocket costs.
  • You  may be able to increase the value of your policy as the value of your Hawaiian property increases with additional permanent life insurance.

At Howard Kaye, we understand the high burden of estate taxes, which is why we specialize in leveraging life insurance as a means of estate value transfer. We’ve managed to heavily discount the estate taxes for many of our clients and can do the same for you. Contact a Howard Kaye representative at 800-DIE-RICH for more information on creating an ILIT as a means of estate tax planning.