“Rhode Island 2015 FY Budget - Elder Care Planning Techniques and State Estate Tax Revisions”

The revised House budget (H-7133 Sub A) impacts the areas of estate planning and elder care planning in two important ways.

June 2014

The revised House budget (H-7133 Sub A) impacts the areas of estate planning and elder care planning in two important ways.  First, with respect to the Rhode Island state estate tax, the creation of a new subparagraph to R.I. Gen. Laws § 44-22-1.1(4) implements a “Rhode Island credit” of $64,400 for all decedents dying on or after January 1, 2015, effectively raising the exemption amount from the current $921,655 to $1,500,000.  This amount will continue to be adjusted annually for inflation in accordance with the Consumer Price Index for all Urban Consumers (CPI-U)).  Additionally, the new estate tax provision eliminates the so-called “cliff-tax” wherein the estate is taxed on the entire value of the estate if the value exceeds the exemption amount by even one dollar ($1.00).  The state estate tax is considered to be a major factor in retaining retirees within a state.   Of the sixteen states that implement a state estate tax, Rhode Island has historically held 15th place, behind only New Jersey whose exemption remains a paltry $675,000.  The new estate tax law moves Rhode Island toward the middle of the pack, ahead of District of Columbia, Maryland, Massachusetts, Minnesota and Oregon, which all have exemption amounts of $1,000,000 in 2014.

Second, the budget impacts elder care planning techniques which rely on the use of so-called “Lady Bird”, or “Enhanced Life Estate” deeds.  The bill creates a new statute (R.I. Gen. Laws § 34-4-2.1) which, for the first time, officially recognizes the use of these deeds which are distinguished from traditional life estate deeds in that the life estate holder also retains the power to sell, convey, mortgage or otherwise dispose of the property without the consent or participation of the remainder interest holders.  Traditionally, these deeds have sometimes been used to transfer real estate to family members while avoiding a transfer penalty for purposes of Medicaid eligibility.  However, the budget contains another new statute (R.I. Gen. Laws § 40-8-3.1) that effectively eliminates this planning opportunity by providing that a Medicaid applicant, who has transferred his or her primary residence using a “Lady Bird” or “Enhanced Life Estate” deed recorded after June 30, 2014, must re-convey the remainder interest to himself or herself prior to qualifying for Medicaid benefits.  Upon re-conveyance of the remainder interest, the life estate holder will again own the entire property in fee simple, as if the transfer had never occurred.


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