Changes in Hawaii’s probate regulations
simplify and lessen the costs
of settling an estate

By Jerry Tune
Star-Bulletin

A new probate code, effective last month, reforms a system that critics complained was filled with high costs and red tape. In the past, court settlement of estates could take years.

It took two decades for the reform to make its way through the state Legislature and Supreme Court. But Taylor, who was a member of an eight-member panel appointed by the Supreme Court in 1993 to study the probate code, says residents with simple wills and limited assets will benefit from the new code.

"You no longer have to use the revocable living trust just to avoid probate," Taylor said.

For an uncontested estate, with documents in order, the legal costs should be about $500 and the normal time to complete probate is about six months, Taylor said.

"You probably only need a couple of hours with your attorney to review the assets and get an idea of what is involved," Taylor said.

There are other things that must be done: getting the death certificate, publishing a list of assets, and dealing with any creditors. But under the new probate code, the court does not look over every step. The executor needs the death certificate, the will and an affidavit identification showing that he or she is the executor.

After talking to the attorney, and getting documents in order, the executor takes them to the registrar at the Probate Court on the ground floor of the the Circuit Court building, 777 Punchbowl St. The registrar then gives the executor letters to be taken to the various places where assets are held, such as banks, thrifts, stock brokerages and the state Bureau of Conveyances to change ownership title of the property.

The executor then contacts these places to transfer the assets.

"Probably 90 percent of the estates will go to the registrar," Taylor said. "The court doesn't get involved."

The new probate code helps residents by:

Eliminating the old system of fees based on the value of the estate, and instead says that fees must be "reasonable." Under the old code, the legal fees and executor fees were tied to estate's value. For example, fees were $42,300 for an estate of $1 million. Now fees are based on the attorney's and paralegal's hourly rate. Paralegals, whose hourly fees can be half that of attorneys, typically can do up to three-fourths of the estate's legal work. So fees for a similar estate now can range from $3,000 and up depending on the complexity.

Providing surviving spouses more protection against disinheritance.

Taylor said he is concerned with the public perception that probate is troublesome, something that has been "drummed into people for many years." This fear has led many families to seek out attorneys who use the revocable living trust -- often when unnecessary.

For a family with a simple estate, the trust can actually cause problems, he said. For example, if a person has been involved in a traffic accident and the liability isn't covered by the insurance then the victim can go after the home in a trust for compensation.

However, if the husband and wife hold the property as "tenants in the entirety" (both spouses have equal, undivided interest), the house is protected from this lawsuit, Taylor said.

There may be other problems with getting bank loans for repairs, or if the surviving spouse doesn't carefully follow the language in the trust.

That doesn't mean that revocable living trusts don't have an appropriate use, he added.

Taylor and other attorneys still say the revocable living trust -- and other arrangements-- remain important for families with estates of more than $600,000. Inheritance taxes can take 40 percent and more of the money over $600,000 if no financial planning is done.

In Hawaii, with high-priced homes, it is common to find families with estates more than $600,000.

"Take the example of a Manoa widow who has a personal residence valued at $600,000 and a rental home valued at $600,000," said Ray Okada, last year's chairman of the Hawaii Bar Association's section on estate planning and trusts. "If she makes no gifts (to her daughter) the inheritance tax is $235,000."

But Okada structured the estate to lower the value of the properties, and end up with no tax liability.

First, the rental property was put into a family limited partnership (FLP) with the widow as the general partner and the daughter, her sole heir, as the limited partner. Then the widow makes a one-time allowed gift of $600,000 of partnership "units" to the limited partner.

But this does not carry the same value because the rental home is now in a FLP, which doesn't have appeal to buyers, Okada said. "Appraisals have been coming in about 45 to 50 percent less (than if the home had no partnership ownership)."

So that means the value of the partnership gift really is $300,000. Add that to the $600,000 value of the widow's personal residence and the total estate is now valued at $900,000. The inheritance tax has been reduced to $114,000 -- a reduction of $121,000.

But Okada wasn't finished.

He set up a qualified personal residence trust which is irrevocable.

"The mother (widow) sets the terms of this trust -- how long the trust will last," Okada said. "During that term she gets exclusive use of the home for a fee. At the end of the term, the home belongs to the daughter."

Because the home is under this irrevocable trust, the home value is lower. "The IRS has tables for this," Okada said. "It depends on factors such as the age of the mother, and how long the term is for. In this case the value was 50 percent."

So now the value of the personal residence is also $300,000. Add that to the $300,000 value of the rental home and the total estate is now valued at $600,000 -- under the limit for inheritance taxes. The inheritance tax liability went from $235,000 to zero.

Of course, if the daughter inherits and then sells the property, the capital gains tax takes effect.

Okada pointed out that this scenario is not for everyone and that for many families the standard revocable living trust may be an easier way to shelter income.