Trusts & Taxes in Hawaiʻi: What Local Families Need to Know

If you’re wondering whether setting up a trust can help reduce taxes, you’re not alone. It’s one of the most common questions I get from Honolulu families and clients across Hawaiʻi.

To help clarify the role trusts play in taxes — and how different types of trusts work — here’s a breakdown of what you really need to know. As always, this is general information, and I’d be happy to walk you through how this applies to your specific situation in a Family Wealth Planning Session.

Two Types of Trusts — Two Different Tax Treatments

When it comes to estate planning in Hawaiʻi, most people will encounter two main types of trusts:

1. Revocable Living Trusts

A revocable living trust (often just called a "living trust") is one of the most popular tools I use for clients in Honolulu. These trusts don’t have any tax impact while you're alive. That’s because the IRS treats the trust as an extension of you — it uses your Social Security Number and doesn’t file a separate tax return.

So why do people create them? Not for taxes — but for avoiding probate, keeping matters private, and streamlining asset transfers after death.

Here’s how they work:

• You (the grantor) transfer assets into the trust.

• You can change the trust, remove assets, change beneficiaries, or even revoke the trust entirely.

• Upon your death, the trust becomes irrevocable.

• Your trustee will apply for a tax ID number for the now-irreversible trust, and it will begin filing its own tax returns.

  
  

At that point, any income the trust earns and doesn’t distribute is taxed — either at the trust’s rates (which are steep) or at the beneficiary’s individual rates if income is passed through.

2. Irrevocable Trusts

Unlike revocable trusts, irrevocable trusts are separate legal entities from day one. Once assets are placed into them, they’re no longer yours. You can’t change the terms, and you can’t take the assets back.

So why use them? Because they can:

• Remove assets from your taxable estate

• Offer strong protection from creditors, lawsuits, and divorce

• Help you qualify for long-term care benefits

• Prevent court involvement down the road

  
  

But they do come with tax implications.

As of 2025, irrevocable trusts hit the top tax bracket of 37% once they earn just $15,650 in undistributed income.

To minimize this, I often set up what’s called a Lifetime Asset Protection Trust that passes income taxes through to the beneficiary — so income is taxed at their lower personal rate instead of the trust’s high rate. These trusts offer both tax efficiency and strong asset protection for your loved ones.

Understanding Estate Tax in Hawaiʻi

There are two kinds of estate taxes to know about if you live in Hawaiʻi: federal and state.

Federal Estate Tax

In 2025, the federal estate tax exemption is $13.99 million per person (nearly $28 million per couple). If your estate is below that threshold, no federal estate tax is owed. But anything above that? Taxed at a hefty 40%.

This exemption is set to drop significantly in 2026 — back to around $6.03 million after inflation adjustments.

Hawaiʻi Estate Tax

Even if you’re under the federal threshold, Hawaiʻi has its own estate tax — with lower exemption limits. That means your estate could still owe Hawaiʻi taxes even if no federal tax is due.

We’ll go over the specifics of Hawaiʻi’s estate tax during your planning session to ensure your estate is protected.

Smart Planning = Lower Taxes

The best part of thoughtful Life & Legacy Planning is this: you have control. Through strategic use of trusts and other planning tools, we can reduce — or even eliminate — your estate’s tax burden. The right plan will depend on your goals, family dynamics, and the types of assets you own.

And because laws and exemptions change, it's critical to plan proactively — especially if you have real estate in Honolulu, growing investment accounts, or family members who need long-term support.

Let’s Talk

If you're wondering whether a revocable living trust, an irrevocable trust, or a combination of planning tools is right for you, I invite you to meet with me. Together, we’ll create a strategy that maximizes your legacy, minimizes taxes, and gives your loved ones the peace of mind they deserve.

Based in Honolulu and serving families across Hawaiʻi, I’m here to help you protect what matters most.

FAQs

Q: Do I need a trust to avoid estate taxes in Hawaiʻi?

A: Not necessarily — but for high-value estates or families with specific goals, trusts can be one of the most effective tools for reducing or eliminating estate taxes.

Q: Will my revocable trust protect me from creditors or lawsuits?

A: No. Since you still control the assets, they’re still considered yours. For protection, an irrevocable trust or a Lifetime Asset Protection Trust may be better suited.

Q: Does Hawaiʻi have its own estate tax?

A: Yes. Hawaiʻi is one of a handful of states with a separate estate tax — and its exemption amount is lower than the federal level.

Q: Can I change my irrevocable trust later?

A: Generally no, but certain types of irrevocable trusts can be drafted with flexibility.

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This article is brought to you by the Law Office of Keoni Souza, a boutique estate planning firm located in Honolulu, Hawaiʻi, proudly serving families on Oʻahu and across the Hawaiian Islands. At our firm, estate planning is about more than documents—it’s about creating lasting peace of mind for you and the people you love. Through our unique Life & Legacy Planning Process, we guide you to make informed, empowered decisions that protect your wealth, your wishes, and your family’s future. To get started, contact our Honolulu office today to schedule your Family Wealth Planning Session. Mention this article to learn how you can receive this $750 session at no charge.

Disclaimer: The information on this website is for informational purposes only and should not be considered legal advice. For guidance tailored to your specific situation, please consult an estate planning attorney licensed in the State of Hawaiʻi. Use of this website or communication through this site does not create an attorney-client relationship with the Law Office of Keoni Souza, LLC.