Wednesday, March 27, 2024
Hawai'i Free Press

Current Articles | Archives

Sunday, June 18, 2017
Closing an Estate Tax Loophole?
By Tom Yamachika @ 5:05 AM :: 4202 Views :: Taxes

Closing an Estate Tax Loophole?

By Tom Yamachika, President, Tax Foundation Hawaii

One of the bills our legislature sent up to Gov. Ige to be signed, which is almost certain to become law because the Department of Taxation sponsored it, is one to close an estate tax “loophole.” The issue isn’t as simple as it might seem, however.

First, some background. An estate tax is imposed when a person dies. The Federal Government imposes it when a decedent owned more than $5.45 million at death. The federal tax rate brackets start from 18% and go to 40%. Only fifteen U.S. states have an estate tax, and Hawaii is one of them. Our law generally conforms to federal law, but our tax rates go from 10% to 15.7%. (Six states impose an inheritance tax, which is similar except that the tax falls upon the heirs; of these, two states also have an estate tax.)

For a person’s estate to have an estate tax liability, the estate is usually substantial, and may include assets in more than one place. For a person who doesn’t reside here, we tax assets that are located, or “sitused,” in Hawaii. For a person who does reside here, we tax all property in the federal taxable estate, but give credit for estate or inheritance taxes paid to other states.

What happens if there is an entity, like a corporation or a LLC, that owns property? Because an entity doesn’t die, the estate tax isn’t imposed on the entity. But entities have owners. Corporations have stockholders, for example. So, the estate tax reaches the value of those ownership interests, such as corporate stock. So far, so good; an individual can’t beat the estate tax by throwing property into an entity. But an individual can use an entity to “situs shift.” Suppose the individual lives in Ohio and the entity owns valuable real property in Hawaii. The entity is not subject to Hawaii estate tax, and neither is the individual, because the shares of stock are generally sitused to the individual’s place of residence. Lo and behold, Ohio doesn’t have an estate tax, so this estate will not be taxed in any state! This is the loophole the bill addresses.

The bill says that if the entity is a single member LLC that has not elected to be taxed as a corporation, then the estate owning the LLC will need to pay estate tax in Hawaii the same as if the decedent owned the Hawaii property directly.

But wait. The bill doesn’t plug the loophole completely. In the situation just described, Hawaii estate tax can be avoided regardless of the type of entity, while the fix only works if the entity owning the Hawaii assets is a single member LLC disregarded for income tax purposes. Thus, if the entity is a partnership, a LLC with more than one owner, or a LLC that has opted to be taxed as a corporation (perhaps a S corporation), the fix doesn't apply and the loophole remains.

Furthermore, how does the Department think it would be able to implement and enforce this law if it is enacted? The Department might be able to find out about a nonresident decedent who owned Hawaii property if there is a Hawaii ancillary probate, which would be needed to distribute Hawaii realty and other Hawaii assets, but how would it even find out about an LLC that owns Hawaii property and has a recently deceased owner? Even if the Department can keep an eye on all the Hawaii properties owned by LLCs, how could it watch their owners? In theory, LLCs that do business in Hawaii, wherever organized, need to register with the Department of Commerce and Consumer Affairs, but the registration form does not require the LLC to state who the owners are, just that a list of the owners will be kept on file at the company’s principal office.

In all, this bill seems like a knee-jerk reaction to a perceived problem. If this situs-shifting anomaly is a loophole that needs closing, it’s very doubtful whether this bill will accomplish it. Well, we can see what happens.

Links

TEXT "follow HawaiiFreePress" to 40404

Register to Vote

2aHawaii

808 Silent Majority

Aloha Pregnancy Care Center

AntiPlanner

Antonio Gramsci Reading List

A Place for Women in Waipio

Ballotpedia Hawaii

Broken Trust

Build More Hawaiian Homes Working Group

Christian Homeschoolers of Hawaii

Cliff Slater's Second Opinion

DVids Hawaii

FIRE

Fix Oahu!

Frontline: The Fixers

Genetic Literacy Project

Grassroot Institute

Habele.org

Hawaii Aquarium Fish Report

Hawaii Aviation Preservation Society

Hawaii Catholic TV

Hawaii Christian Coalition

Hawaii Cigar Association

Hawaii ConCon Info

Hawaii Debt Clock

Hawaii Defense Foundation

Hawaii Family Forum

Hawaii Farmers and Ranchers United

Hawaii Farmer's Daughter

Hawaii Federalist Society

Hawaii Federation of Republican Women

Hawaii History Blog

Hawaii Homeschool Association

Hawaii Jihadi Trial

Hawaii Legal News

Hawaii Legal Short-Term Rental Alliance

Hawaii Matters

Hawaii's Partnership for Appropriate & Compassionate Care

Hawaii Public Charter School Network

Hawaii Rifle Association

Hawaii Shippers Council

Hawaii Smokers Alliance

Hawaii State Data Lab

Hawaii Together

HIEC.Coop

HiFiCo

Hiram Fong Papers

Homeschool Legal Defense Hawaii

Honolulu Moms for Liberty

Honolulu Navy League

Honolulu Traffic

House Minority Blog

Imua TMT

Inouye-Kwock, NYT 1992

Inside the Nature Conservancy

Inverse Condemnation

Investigative Project on Terrorism

July 4 in Hawaii

Kakaako Cares

Keep Hawaii's Heroes

Land and Power in Hawaii

Legislative Committee Analysis Tool

Lessons in Firearm Education

Lingle Years

Managed Care Matters -- Hawaii

Malama Pregnancy Center of Maui

MentalIllnessPolicy.org

Military Home Educators' Network Oahu

Missile Defense Advocacy

MIS Veterans Hawaii

NAMI Hawaii

Natatorium.org

National Christian Foundation Hawaii

National Parents Org Hawaii

NFIB Hawaii News

No GMO Means No Aloha

Not Dead Yet, Hawaii

NRA-ILA Hawaii

Oahu Alternative Transport

Obookiah

OHA Lies

Opt Out Today

OurFutureHawaii.com

Patients Rights Council Hawaii

PEACE Hawaii

People vs Machine

Practical Policy Institute of Hawaii

Pritchett Cartoons

Pro-GMO Hawaii

P.U.E.O.

RailRipoff.com

Rental by Owner Awareness Assn

ReRoute the Rail

Research Institute for Hawaii USA

Rick Hamada Show

RJ Rummel

Robotics Organizing Committee

School Choice in Hawaii

SenatorFong.com

Sink the Jones Act

Statehood for Guam

Talking Tax

Tax Foundation of Hawaii

The Real Hanabusa

Time Out Honolulu

Trustee Akina KWO Columns

UCC Truths

US Tax Foundation Hawaii Info

VAREP Honolulu

Waagey.org

West Maui Taxpayers Association

What Natalie Thinks

Whole Life Hawaii

Yes2TMT