Rhode Island Estate Tax: The Simple Guide [Step by Step]

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Paul Sundin, CPA

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Rhode Island is geographically speaking the smallest state in the country. But it does have a few big tax concerns.

In this article, I will discuss the Rhode Island estate tax, inheritance tax and gift tax. If you have a large estate (or are looking to receive a large inheritance) you might want to pay close attention.

Rhode Island Estate Tax 

Rhode Island ‘s estate tax rate starts at .8% and goes up to 16%. The current exemption amount is $1,537,656.

If your estate is lower than the exemption amount, there is no estate tax due. If your estate exceeds the exemption, the rates are graduated based on total estate value.

Federal Estate Tax Planning

Many people often refer to the estate tax as the death tax. Fortunately though, less than 1% of U.S. taxpayers are subject to the tax. Thanks to a generous exemption, most people just don’t have enough assets. 

But if you have enough assets, calculating your estate tax can be a daunting task. The executor certainly should hire an estate attorney and a CPA to review and work through all the numbers and tax filings.

The process usually starts with analyzing all the assets of the decedent. All person holdings should be valued in addition to all brokerage accounts, including retirement accounts. Even though retirement accounts will pass to the beneficiaries, they are still subject to the estate tax.

The next step is to reduce it for mortgages and other debts. You can then subtract legal, tax, and other professional fees like appraisals. Don’t forget to also subtract burial fees another funeral costs.

The net of all these calculations is called net assets. This amount over the exemption is subject to the 40% tax rate as well as taxes in various states.

What about Portability?

Portability is a very important issue for married people. Unfortunately, the Rhode Island estate tax is not portable between the two spouses. This means simply that when both members of a couple pass away, only a single exemption amount applies. It is not double the exemption.

Trust Tax

In the event you pass away, you may not have enough assets to take advantage of the federal estate tax exemption. Fortunately, there are ways to minimize your estate tax burden. A good estate attorney will consider these issues as part of the planning process.

A federal exemption is only available to individuals, and if you have more than $5.5 million in assets, your estate may still be subject to a state estate tax. But you can still avoid a state estate tax by maximizing your exemption.

One way to protect your assets is to use a credit shelter trust. This type of trust can be a part of your Will or revocable living trust. If you have a car accident, the judgment may be much higher than the insurance limit on the vehicle.

The trust can protect your assets from creditors of your surviving spouse and future beneficiaries. You may not realize it at the time, but a properly drafted credit shelter trust can protect your assets even after death.

Another way to minimize your estate tax burden is to set up a B Trust. These trusts preserve the federal estate tax exemption and credit of the deceased spouse. If you have a business, the value of your business may cause your estate to exceed the exemption amount by 2022.

To avoid this scenario, you should create a succession plan for your business. If you have a spouse who is under 18, you can consider leaving the business to your spouse. This way, you can avoid including the business in the estate tax calculation.

Rhode Island Gift Tax & Inheritance Tax

Thankfully, Rhode Island does not have an inheritance tax. However, Rhode Island residents could have to pay inheritance tax based on the laws of another state if the person passing money to you passed away there.

More good news is that Rhode Island does not have a gift tax, but the federal gift tax applies on gifts of more than $15,000.

How to Avoid (Legally) the Rhode Island Estate Tax

Just because you may have net assets in excess of the estate exemption doesn’t mean you don’t have options. There are several planning techniques available to get under the exemption amount. The following is a list of some ideas:

  • Revocable Grantor Trusts
  • Irrevocable Life Insurance Trust
  • Qualified Terminable Interest Prop
  • Qualified Personal Residence Trusts  
  • Special Valuation of Farms and Businesses
  • Grantor Retained Income Trusts
  • Intentionally Defective Grantor Trust
  • Direct Tuition Payments
  • Family Limited Partnerships
  • Charitable Gift Annuity
  • Direct Medical Payments 
  • Charitable Remainder Trusts
  • Gifts Below Annual Exemption
  • Grantor Retained Annuity Trusts
  • Grantor Retained Unitrusts
  • 529 Plans (education)

When should someone think about estate planning?

Estate planning is not easy even for experienced CPAs. But most people should consider even a limited approach. People who are in the following situations are most likely to have estate problems:

  • Retirement accounts in excess of $1 million
  • Medical and healthcare professionals
  • CPAs, accountants, attorneys, engineers, IT professionals
  • Business owners and entrepreneurs
  • Consultants with significant earning potential
  • People with multiple rental properties
  • People with life insurance policies of at least $1 million
  • People who stand to receive a large inheritance

Rhode Island Tax Structure

Rhode Island income taxes are about average when compared to the rest of the country. The tax rates are progressive ranging from 3.75% to about 6%.

The average effective property tax rate is 1.5% to 1.75%. The sales tax rate is 7%, and local governments cannot add to that rate.

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