You have spent a lifetime of earning, saving and investing — and paying income and capital gains taxes all the way along. So you may wonder why our government feels entitled to tax the value of everything that’s left when you die. The sad fact is, however, that the IRS and the State of Hawai‘i are going to want a piece of your estate.

In fairness to our government, the estate tax law currently provides sizable exclusions from the estate tax. Hawai‘i allows the first $3.5 million of your estate to pass tax free, and the U.S. is a bit more “generous.” The Federal exclusion is $5 million for 2011, and it will be adjusted for inflation (presumably upward) in 2012, so that it will be some number in excess of $5 million. Ok, since many of us don’t own house multi-million homes, you may think you’re safe … but read on.

What the exclusions mean is that if a Hawai‘i resident dies in 2011 or 2012 with an estate valued at no more than $3.5 million, there will be no Federal or Hawai‘i estate tax. If the estate is worth between $3.5 million and $5 million, there will be Hawai‘i estate tax, but no Federal estate tax. Once the estate exceeds $5 million, both Hawai‘i and the IRS will take a bite out of the estate.

The Hawai‘i tax is charged at effective rates that begin at 9.6% for estates that exceed $3.5 million, and they range up to 16% for estates worth in excess of $10,040,000. The Federal rate is currently a flat 35%.

But then a funny thing happens in 2013. The Hawai‘i rules are currently set to stay the same, but the Federal rules are scheduled to change radically. In 2013, the Federal exclusion will drop from $5 million to $1 million, and the tax rate will soar from 35% to 55%. RED ALERT! A $5 million exclusion means most of us are safe from Federal estate tax, but a $1 million exclusion means that most of us who own a house and have a retirement plan and some life insurance need to be concerned about what will be left for our loved ones after the tax man takes his piece.

In the midst of all of this, the winds of legislative change are swirling. Among other changes, the Hawai‘i legislature is considering whether the Hawai‘i exclusion should match the Federal exclusion (whatever it happens to be at the time), and Congress is considering whether to set the exclusion at $3.5 million (at least until the next round of changes).

At this point, the only thing we can be sure of is that we can’t be sure of what the rules are going to be in two years. This makes planning difficult, but not impossible. The uncertainty highlights the fact that we have to stay on top of our estate plans and make sure that they stay current with changes in the law so our loved ones don’t end up paying tax that could have been avoided.

If you have not updated your estate plan within the past year, it is time for you to consult your estate planning advisors to make sure your plan will work as intended. Even if your plan is current as of now, beware that imminent changes to the law may make it obsolete in the very near future.