Prior to May 1, 2010 the answer to this question was No, but on April 30 the Hawaii legislature overrode Governor Linda Lingle's veto of a state estate tax bill and so now Hawaii does collect a state estate tax. The tax will apply to the estates of residents and nonresidents who own real estate and/or tangible personal property located in Hawaii that exceed $3.6 million in value.
Between January 1, 2005 and April 30, 2010 Hawaii did not collect a state estate tax due to major changes that took effect with regard to federal estate tax laws. What do federal estate tax laws have to do with Hawaii state estate taxes? Prior to January 1, 2005, Hawaii collected a separate estate tax at the state level, called a "pick up tax," that was equal to a portion of the overall federal estate tax bill.
What is the Pick Up Tax?
The "pick up tax" is a state estate tax that is collected based on the state estate tax credit that the IRS allowed on the federal estate tax return, IRS Form 706, prior to January 1, 2005. Each state had different tax laws with regard to the pick up tax, so the amount that a state would collect varied based on that state's own estate tax laws. In essence, however, the overall estate tax bill was not increased or decreased due to the pick up tax. Instead, the total tax bill was apportioned between the IRS and state taxing authority.
So what does this mean in plain English? It means that a portion of the federal estate tax was actually taken away from the IRS and instead paid to the decedent's state taxing authority. As such, prior to January 1, 2005, if a deceased Hawaii resident owed federal estate taxes, then the Hawaii Department of Taxation collected the pick up tax from the deceased Hawaii resident's estate.
What is the Future of the Pick Up Tax?
Effective January 1, 2005, the pick up tax was officially phased out under the provisions of the Economic Growth and Tax Relief Reconciliation Act ("EGTRRA"). In response to these changes in federal law that phased out the pick up tax, some states that used to collect a pick up tax chose to enact laws that allow the state to still collect a state estate tax. This is referred to as "decoupling" since the states that enacted a state estate tax no longer based their state estate tax laws on current federal estate tax laws.
The majority of states, including Hawaii, did absolutely nothing and therefore no longer collect a state estate tax. But bowing to a fiscal crisis the Hawaii legislature chose to bring back its state estate tax for deaths occurring between May 1, 2010 and December 31, 2010.
With all of that said, note that the pick up tax, along with the federal estate tax, are both scheduled to come back on January 1, 2011, due to the sunset of EGTRRA. If Congress allows this to happen, then the status of the Hawaii estate tax under its new law is currently unclear.
Even Without an Estate Tax Some Hawaii Probate Judges Required Executors to File a Hawaii Estate Tax Return
Note that for deaths occurring between January 1, 2005 and April 30, 2010, some probate judges in Hawaii have requested that Executors of Hawaiian estates still file a Hawaii Estate Tax Report, called Form M-6, even though no estate tax will be due to the state. For more information about this requirement, refer to the notes attached to Form M-6.
For more information about the Hawaii estate tax, refer to the Hawaii Department of Taxation website.
Does Hawaii Collect a State Inheritance Tax?
The answer to this question is No, Hawaii no longer collects a state inheritance tax because it was replaced with a state estate tax under The Estate and Transfer Tax Reform Act of 1983.
