Although civil unions were likely already recognized as marriages for Hawaii tax law purposes (see Haw. AG Op. 11-2), Act 60 (2013) makes it clear that such unions should be recognized as marriages under Hawaii’s new estate tax law under Chapter 236E, HRS. The relevant portion of Section 5 of Act 60 amends Section 236E-7, HRS, as follows (changes underlined):
Amounts set forth on a duly filed and accepted federal return for valuations of property, the gross estate, federal taxable estate, and applicable exclusion amount shall be conclusive for purposes of this chapter, and the return required under this chapter shall use the same amounts as the corresponding amounts on the federal return
[.]; provided that with regard to a decedent who was in a valid civil union or recognized equivalent under the laws of the State, but that is not recognized by the Internal Revenue Code as a marriage for federal tax purposes, computations of the valuations of property, the gross estate, federal taxable estate, and applicable exclusion amount shall be made as if the civil union or recognized equivalent under the laws of the State were recognized as a marriage.“
- Purpose. In 2012, the legislature passed Act 220 in order to (a) raise revenue; (b) conform Hawaii’s estate and GST tax law as closely as possible to that of the Internal Revenue Code (“IRC”); and (c) simplify the filing of returns and minimize taxpayers’ burdens.
- Effective Date. Act 220 creates a new HRS chapter and is applicable to decedents dying after January 25, 2012. Chapter 236D, HRS (the old law), is still in effect for prior periods.
- Conformity to Federal Law. Act 220 requires filing a return only where the IRC also requires it. The taxable estate, exclusions, and due date to file and pay generally conform to the IRC. The Hawaii Department of Taxation (“DOTAX”) will follow IRS determinations as to waiver of penalties, extensions of time to file, and extensions of time to pay. Notice to DOTAX is required 90 days after an amended return is filed with the IRS.
- $5.12 Million Exclusion. Act 220 provides that Hawaii’s estate and GST tax “applicable exclusion amount” matches the federal exclusion of $5.12 million, indexed for inflation in 2012. Under the IRC, the exclusion is set to fall to $1 million (also indexed for inflation from 1997) in 2013.
- Tax Rate. 10% to 15.7% (top rate at $5 million; not indexed for inflation) estate tax on the “net taxable estate,” which is the taxable estate less the applicable exclusion amount ($5.12 million in 2012). This is on top of the 35% Federal Estate Tax.
- Hawaii Exclusion vs. Federal Credit. Hawaii has a true exclusion from estate tax while the federal exclusion is actually a credit. This means that the first dollar above the $5.12 million exclusion amount is taxed at the lowest rate (10%) in Hawaii but at the highest rate by the Feds (35%).
- Gift Tax. Hawaii does not have a gift tax; IRC does. This means that taxable gifts reduce the Federal exclusion but not the Hawaii exclusion.
- Generation Skipping Transfers. Act 220 imposes a tax (2.25%) on generation skipping transfers of (a) transferred property located in Hawaii; and (b) transferred property from a Hawaii resident trust. A “resident trust” means a trust administered in Hawaii or where 1/2 or more of the trust’s fiduciaries are Hawaii persons. GST exclusion is also $5.12 million.
- Civil unions. Recognizes civil unions even though Act 220 incorporates sections of the IRC which does not. Think marital deduction.
- Statute of Limitations on Refunds. Act 220 provides for a statute of limitation on claiming a refund; the old law did not. Generally, the period is one year following the end of the period for claiming refunds from the IRS or one year from the final determination of the corresponding Federal tax.
Click here for the Hawaii Department of Taxation’s Announcement on Act 220.