John Hazen White’s LOOKOUT: RI #2 Least Friendly Place to Die
Monday, February 03, 2014
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.
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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