Estate planning is important for most of us; not just for the uber-wealthy. However, most Americans have no plan in place. We need to rectify this. The good news for us kamaaina (and by the way, if this term is unfamiliar, then this article may be irrelevant) is that the state of Hawaii has no inheritance tax. Don’t celebrate, yet. Because the bad news is that Hawaii happens to be one of only twelve states with an estate tax. My goodness, this is getting complicated. What’s the difference? So let’s talk straight: First off, as a fiduciary and financial advisor, I do not provide tax advice. But I choose to work with island families because it’s my heritage. My family has been a part of the Aloha State for over 150 years and I delight in looking out for my island neighbors. Ohana is a very big thing here, so let me introduce some basic inheritance laws so that it can be beneficial to the hoi polloi. But make no mistake about it, estate planning is a hyper-complex endeavor. Estate planning is not a DIY project; be forewarned. At minimum, work with someone you trust, but go further and make sure they’re a ‘fiduciary’, Hawaii-licensed financial advisor. Together you can seek out and engage an estate planning attorney to help you navigate these complex waters.
Again, Hawaii does impose an estate tax on island residents. Remember, Hawaii is a very ‘Blue’ state and the democratic ideal (some say, ‘welfare state’) is prevalent in it’s laws too. Here’s what I mean, the Hawaii estate tax is clearly a ‘progressive’ one. That is, the tax percentage gets progressively higher the more you earn. Whereas, lower-income earners aren’t hit as hard. Fair enough. Irregardless of income, the exemption is set at $5.49 million deaths taking place in 2021. Therefore, if you call Hawaii home and leave behind more than $5.49 million, your estate may receive a Hawaii estate tax bill. It doesn’t stop there. The ‘federal estate tax’ is separate from the ‘Hawaii estate tax’. The federal estate tax is levied only on estates worth more than $11.7 million (again, for deaths occuring in 2021).
NOTE: A Hawaii estate tax report must be filed for estates valued at more than $5.49 million. This includes everything one has from the value of their real estate portfolio, to bank accounts, investment portfolios, life insurance policies, qualified and non-qual retirement accounts, as well as other assets.
At our firm, we often get the question of whether an individual should a have will or a trust. Both are estate planning tools that can help ensure your assets are protected and bequeathed to your heirs, (besides your spouse, which is generally not an issue). One thing is for certain, it is always best to create and leave a valid will and last testament. It’s about control, that is, it provides you with the most control over how and to whom your estate is distributed. A will is simply a written document expressing a deceased person’s wishes. Trusts take it a step further and offer more control of your assets. Yes, a trust is more expensive, but it does more and is actively managed. Whether you choose to leave behind a will or a trust depends on your circumstances. My professional advice is to seek the counsel of, and guidance from an estate planning attorney licensed in Hawaii.
So, what if you die without a will? Well, it’s called intestate. The state of Hawaii will get involved, and it is not the best route for you to take. Why? Because it is not about your express wishes. As I half-jokingly tell a few clients who dismiss the need for a will. I say, ‘get one, because if you don’t, the state of Hawaii has one for you…but you just might not like it.’ Instead take control of your personal wishes. Yes, the distribution of your assets is vitally important too; but your carrying out your wishes are the intangible, invaluable.
Do I need a trust? Is it expensive? What are they? These are common questions we frequently hear. For starters, there are many types of trusts. However, taking a high-level view, it comes down to having two categories: living and testamentary. You’ll find a lot of information on both categories online. One huge difference between a will and a trust comes down to ‘privacy’. A will goes through ‘probate'(term meaning, ‘to prove’), essentially proving in court that a deceased person’s will is valid. Upon your death, your will goes through probate(read publicly), and a trust does not. A living trust passes property outside of probate court; privately not publicly read. Another benefit is that there are no attorney fees after the trust is established. Your property can be passed immediately and directly to your named beneficiaries.
As you can see, overseeing your own estate, or supervising the fine points of inheriting money from the estate of a loved one, can quickly get problematic. To alleviate the pain, I suggest people start by seeking out a trusted advisor. Better yet, hire a fiduciary–that is, the legal requirement for financial advisors to work in their customers’ best interest. Estate planning can be overwhelming. We recommend you speak with your financial advisor.