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John Hazen White’s LOOKOUT: RI #2 Least Friendly Place to Die

Monday, February 03, 2014

 

John Hazen White

I have to be completely honest about this: if I can avoid it, I don’t want to be a Rhode Islander when I die. I was born here, have lived here pretty much all of my life, and operate a sizeable business in the state but I do not want to shuck the mortal coil as a resident of Rhode Island. Although I love my home state and have made a personal business commitment to staying here, the reason I want to avoid dying as a Rhode Island resident is simple: our estate tax makes Rhode Island “the second least friendly place to die” in the U.S., according to a recent survey by the personal finance publication Kiplinger.

Kiplinger is only reminding me of what I already know, because any estate attorney or tax accountant operating in the Ocean State will inform someone in my position about the financial perils of dying as a resident. In fact, to not advise me of this would almost constitute professional malpractice. It’s like not telling a homebuyer in California that they now live on the San Andreas fault.

Rhode Island’s estate tax has been called “punitive” and even “near criminal,” strong terms indeed, because of the way it intentionally pillages income from a deceased resident with total assets starting at just a few million dollars. At a current exemption of just $921,655, Rhode Island has the lowest exemption threshold in New England and at number 49 is second lowest among all the states (New Jersey, at $675,000, has the lowest exemption threshold of all).

Avoiding the Death Tax

Neighboring Massachusetts and Connecticut have exemptions at $1 million and $2 million, respectively. Further north, New Hampshire has no estate tax at all while Maine’s is at $2 million and Vermont comes in at $2,750,000. (Bear in mind, the estate tax falls on any assets above the exemption level.)

Why do so many Rhode Islanders move to Florida and establish residency in the Sunshine State? It’s not only to escape the personal income tax but also to avoid the dreaded “death tax,” aka the estate tax. Like Florida, a majority of states do not impose an estate tax. In comparison, the federal estate tax is far less onerous than Rhode Island’s estate tax. As of 2011 the federal estate tax has an exemption threshold of $5 million and it can be far friendlier to a deceased’s estate because of built-in “portability” regarding allowable divisions of taxable assets.

Here’s a simple table showing the calculation of the Rhode Island estate tax on varying estate asset levels, minus liabilities, that demonstrates what a bite the Ocean State takes. Worse, full payment has to be made within 9 months’ time, whereas the IRS can allow up to 14 years to settle with the taxman.

Graphic courtesy of John Hazen White

What every estate attorney and tax accountant will tell a person of some wealth who is a Rhode Island resident, or any individual relocating to our state, is to have an active plan in place that reduces one’s exposure to the state’s estate tax over time by essentially relinquishing all physical and even circumstantial ties to the state by reestablishing those ties elsewhere. So no domicile, no bank accounts, no organizational or community-based ties to the state. Even as a statutory resident, as in those snowbirds who live in the state only part of the year (not more than six months and one day), the objective is to reduce in-state assets as much as possible. Even if you rent when back in Rhode Island, you could be subject to our estate tax upon death.

Escaping the estate tax in planned redeployments of assets to a spouse or children and physical withdrawal of one’s person from the state is fine if you could plan the time and circumstances of your death, but death doesn’t work that way. Any of us could die tomorrow. And when we own “illiquid assets,” like a brick and mortar business like I do, it’s not so easy. If I died tomorrow owning Taco, Taco’s total value would be assessed by the IRS and become subject to both federal and state estate taxes. With less than a year to pay the Rhode Island tax bill, my estate could be strained to come up with the money, and it’s not inconceivable that my family might even have to sell the business. That’s a scenario that doesn’t make me sleep easier at night.

Leaving Lock, Stock, and Barrel

Does the Rhode Island estate tax cause wealthier individuals to leave the state to escape its reach? While there is no empirical evidence of that, there is a ton of anecdotal evidence. As I said upfront, professionals advising on wealth management will tell you stories of some clients who, knowing the facts, decide not to make the necessary adjustments to escape the estate tax for strictly personal reasons, but that is rare. Most make plans to transfer assets to spouses and family members while others just pick up and leave, lock, stock and barrel.

The progressive argument is that wealthy individuals should be subject to a hefty estate tax as well as higher tax rates on personal income as part of wealth redistribution to redress inequality. There is also a politically inspired philosophical argument against the accumulation of great wealth over generations within families, hence death taxes to trim that wealth and redistribute it within society. But these arguments fail to acknowledge the social good that many wealthy individuals provide or consider what practical good is actually achieved through such selective taxation and so-called “redistribution. The fact is, Americans do not despise wealth; they seek rightly earned wealth as part of the American Dream.

We’re seeing this in New York City right now with a new mayor who wants to tax individuals who earn above $500,000 a year to help fund pre-k education. While funding pre-k education is a laudable objective, only a cockeyed optimist thinks the money will ever end up where it’s supposed to go (Mayor Taveras has floated a similar plan but he hasn’t yet identified just how he would pay for it).

Individuals like me who have successful businesses don’t want to be forced to leave the state because of the taxes, but by the same token one would have to be a masochist or a marxist to remain passive in the face of a state waiting for the chance to raid one’s estate. Force wealthy individuals to leave the state and then consider what goes with them: the taxes they already pay and any charitable and community giving they provide, which can be considerable.

Raising the Estate Tax Threshold

Thankfully, there is movement on the estate tax in the General Assembly. A bill has been introduced by Rep. Robert Craven, a North Kingstown Democrat, to raise the threshold exemption up to $2 million. Better yet, but undoubtedly a bridge too far, is the Greater Providence Chamber’s call for an exemption threshold of $3 million. Either figure would place our state in a new light, making us competitive with our neighbors.

Rep. Craven’s bill will be attacked as a service to millionaires and a tax revenue loss that Rhode Island cannot afford. No one is calling for an elimination of the estate tax, although that would the best choice the state could make. After all, the Rhode Island estate tax only brings in about $30 million a year because of the attempts made to avoid it as much as possible. Like New Hampshire, we could live without an estate tax and be a more welcoming state to outsiders.

It would be refreshing if opponents recognized the very real benefits of retaining a strong base of wealthy individuals and even creating conditions wherein wealthy individuals sought out the state as a place to reside in, as they have done in the past. If tax-the-rich proponents would acknowledge the societal usefulness and the good that would flow from such a situation, they should agree that raising the estate tax exemption threshold is in everyone’s best interest.

John Hazen White, Jr. is President and CEO of Taco, Inc. in Cranston and is the founder of Lookout RI.
 

 

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Comments:

Poor people do not pay taxes, invest in research and development, make capital expenditures, and create jobs. Rich people do. So let us stop vilifying wealthy people. Let us become a more inviting state to wealthy people by reforming our cost structure and reducing taxes and regulations.

Alternatively, do not reform and watch Rhode Island die a slow Detroit-like death.

Comment #1 by Christopher Lee on 2014 02 03

I applaud Mr. White for his insight in this very important issue. We need to stop plucking the feathers from the goose that lays the golden eggs. While we're on the topic, this is not the only reason that older people of financial means leave our state. We are also a state that taxes state and municipal pensions. There are thousands of state pension checks that are mailed out of state. Just imagine that these people were teachers, firefighters, police etc. in RI for their entire careers but must retire to another state to avoid being taxed on the very pensions that were earned while being employed here. We must stop being so short-sighted with the "penny wise and dollar foolish" mentality.

Comment #2 by Representative Anthony Giarrusso on 2014 02 03

Add military pensions, which unlike state/municipal pensions, were probably not earned (or at least significantly earned) while living in the state.

You can't find $30M in an 8B budget..

Comment #3 by Prof Steve on 2014 02 03

not sure what the end game is for the progressives?

RI will have , hundreds of laws against this and that, same sex marriage, legalized marijuana, the list of social issues goes on.

but there will be no jobs and billions in debt and nobody left to pay the bills.....

people laugh about RI turning into Detroit. what's stopping it?

we are at the bottom of the heap in everything.

Comment #4 by john paycheck on 2014 02 03

Excellent points by above contributors. All the signs and symptoms were there regarding Detroit, Central Falls, etc., but were ignored. The governor and General Assembly are ignoring our financial plight. Only when forced will RI politicians confront the reality of exceedingly high costs and taxes, onerous regulations, the flight of wealth, and the influx of tax consumers.

Comment #5 by Christopher Lee on 2014 02 03

1. Rhode Islands economy is so small that we should position our taxes and other revenue streams below those of our neighboring states (MA 35 billion, Ct 43 billion RI 8 billion). Any lost revenue to their state coffers through a loss to RI would be minimal.

2. Make our social welfare safety net less appealing than MA and CT. Those states have stronger economies and can afford more generous benefits for the poor. In the very least we should be on par with them.

Comment #6 by Redd Ratt on 2014 02 03

Good article...As an investment advisor I can confirm that John's article rings very true. Most people who have significant wealth are quite philanthropic but there is also great resistance to giving already taxed earnings back to the State or Federal Government as though they somehow deserved it.I know that I would rather select who the beneficiaries of my estate are. I would choose appropriate charities that I believe in and invest in on-going businesses with my life long earnings, rather than have the State confiscate these already taxed dollars.Additionally I plan to leave healthy amounts to my family and friends who mean a great deal to me.I feel that it is my right as an individual to allocate the fruits of my labor as I see fit.

Comment #7 by michael riley on 2014 02 03

I don't blame JHW for seeking to avoid estate taxes, I'd probably be tempted too if I had such wealth. But the race to the bottom as states compete by letting great wealth escape taxes greatly hurts our country. (Did you note the ad from NY State, new companies there can get no taxes for 10 years. Someone else pays, or things don't get done.
No wonder there is not enough $$ to fix infrastructure, keep higher education affordable (it was free when I was a kid, the country boomed though marginal tax rates were high), maintain and expand parks, ensure housing for the homeless, and so on. Great accumulated wealth does us no good. The moguls and their companies have more than enough capital but they either invest overseas, or they are sitting on it, (plus maybe using it buy elections thanks to the Citizens United case) as wages and benefits have been driven down and we don't have the purchasing power to justify much expansion here.

A psychologist friend explains why so many suck up to the rich and powerful, its not just in hopes they will notice and give them a job or of winning a lottery - voting and advocating for the rich, even if against your own interests, makes people feel like more of a winner to be so associated with the wealthy. That may sound pathetic but it is apparently a powerful motivsting force.

Comment #8 by barry schiller on 2014 02 05




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