DO I PAY TAX AT MY DEATH?
Estate planning attorney John Roth unpacks the estate tax and gift tax rules to answer wether you (or rather your estate) will owe taxes when you pass. What year you die in, how many gifts you gave in your life, and how much wealth you die with all matter when considering if you will owe estate taxes. The short answer is: for more than 99% of people, estate taxes will not apply because the estate tax exclusion amount is now so high in the millions.
ESTATE TAX
The tax that is paid when someone dies is called estate tax, also sometimes referred to as death tax or inheritance tax. Estate tax is only paid when someone dies with enough wealth. Estate taxes are paid by the decedent’s estate before assets are distributed to heirs, and are based on the total value of the estate. This generally includes all the decedent’s assets, both financial (such as stocks, bonds, and mutual funds) and real (such as homes, land, and other tangible property). It also includes the decedent’s share of jointly owned assets and life insurance. In contrast, inheritance taxes are usually paid by the recipient of the inheritance or the heir, and are based on the amount distributed to each beneficiary.
The estate tax exclusion amount is the amount of money that a person can leave to another person or entity without paying estate tax. This number has changed dramatically over time and is pegged to inflation. So every year we have a new estate tax exclusion amount, whether it is because of new tax law or inflation. In addition to the federal estate tax, some states, like Hawaii, have an additional estate or inheritance tax. In the 90s the estate tax exclusion amount was mostly around $600,000. This meant that a lot of people who passed away in the 90s had to pay estate tax. As a result, estate plans (which usually include a will, advance health-care directive, power of attorney, and sometimes a trust) made in the 90s usually tried to minimize estate taxes owed.
The estate tax exclusion amount has gone up significantly over the years. In 2021 , in the state of Hawaii, it is $5.49 million per person. That means that you probably don’t have to worry about paying estate tax, unless you have $5.49 million dollars or double that for married couples. The size of the estate tax exemption means very few (fewer than 1%) of estates are affected. Also, any property left to a qualifying charity or a spouse who is a U.S. citizen passes free of estate tax.
GIFT TAX
Another common question related to estate tax is: What if I give someone something during my life? Is it subject to gift tax? Whether wealth is transferred during your life as a lifetime gift or after your life as an inheritance, the government keeps track of these wealth transfers and they may be subject to wealth transfer tax. Generally, you can give $15,000 to any person, as many people as you want, each year, without being subject to any taxes. Other exclusions include giving gifts to charities.
So, if you give more than $15,000 to an individual in a given year, the gift tax rule says that you should file a gift tax return. Based on these tax returns, the IRS will keep track of the total amount of lifetime gifts you make throughout your life. When you pass away, the estate tax exclusion amount will then be decreased by the amount of lifetime taxable gifts you have made. For most people, even if they give a child a home or piece of property, unless it’s up there in the millions, no estate tax will be owed at the end of their life.
SHOULD I HAVE TAX PLANNING IN MY ESTATE PLAN?
For more than 99% of people, estate taxes will not apply. But if you have a high net worth, it’s recommended to meet with an estate planning attorney, in the state where you live, to discuss possible benefits of tax planning. Also, if you last did your estate plan back in the 90s, your plan probably has unnecessary tax planning that may make things more complicated for your heirs. It’s recommended to update your estate plan every 4-5 years to make sure it still suits your goals and is in line with current law and tax rules.
We hope you found this information on estate taxes in Hawaii helpful. If you have any questions please comment below or contact us.
BIOS
JOHN ROTH
John is the founder of Hawaii Trust & Estate Counsel, a statewide Hawaii estate planning law firm with offices in Waimea, Hilo, Kona, Maui, and Honolulu. He has taught Estate Planning at the Richardson School of Law, and business law courses at the University of Hawaii—Hilo. He started “Just Ask John” as a monthly newspaper column answering commonly asked estate planning questions, in the North Hawaii News, then in The West Hawaii Today. Now it’s an online blog and video series. ....MORE
MAKE AN INFORMED DECISION
Estate Planning is necessary because, as the old expression goes, "You can't take it with you" and you never know what's going to happen in life.
The estate planning documents of a will, advance health-care directive, power of attorney, and sometimes a trust help someone step into your shoes to make decisions on your behalf, during your lifetime. Then after your lifetime, you may need a will or will substitute, such as a revocable living trust, if they want to control who inherits their property and how and when that inheritance is received, to minimize administration costs, and to avoid unnecessary taxes. A well-planned estate is a gift to your loved ones and provides you peace of mind. It is part of your legacy.
Everyone has a different story and should have a unique estate plan. In most cases, the first meeting with one of our attorneys is complementary and serves the purpose of understanding your goals and educating you on your options. Depending on the option that is right for you, we will give you a price quote at the first meeting, before moving forward with your plan. Feel free to explore the basic information on our website.
This blog does not contain legal advice. You should not rely on this to determine what is in your own best interest. For legal advice, specific to your situation, you must meet with an attorney. All posts are based on hypothetical scenarios, not the actual circumstances of real clients.
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