New Estate Tax and Medicaid Rules in the RI State Budget

June 24, 2014

Within the recently-approved RI budget were key changes to the State estate tax and Medicaid qualification rules. These changes could significantly impact retirement and estate planning for those nearing or in retirement.

The first change is to the estate tax exemption. Back in 2001, Congress passed tax legislation to attempt to phase-out the Federal estate tax for the vast majority of US citizens. Rhode Island quickly passed its own estate tax bill, effectively decoupling from the Federal law, because the RI General Assembly foresaw a potential decrease in state tax revenue, therefore instituting an exemption of $675,000. In addition, unlike the Federal law, (where just the overage above the exemption is assessed a tax levy), the entire estate value would be subject to the RI estate tax. (This is often referred to as a “cliff-tax”). Until the recent change, Rhode Island was one of the worst states in which to leave an estate subject to tax. Over the past decade, the limit had gradually increased to $921,655, but was still significantly below the Federal exemption of $5 million.

Presumably in response to the exodus of RI retirees to other states that were more “tax-friendly”, the General Assembly significantly raised the estate tax exemption limit to $1.5 million; about the middle of the pack nationwide. In addition, the Assembly dropped the “cliff-tax” provision, so only the estate value exceeding the exemption will be taxed, not the entire estate.

Another important change involves the so-called “Lady Bird” life-estate deed in Medicaid planning. Prior to this change, a person could transfer ownership of their home to another person but retain the right to use the property for the rest of their lifetime. In addition, the (former) owner retained all rights to sell, mortgage or dispose of the property. This technique had been an effective Medicaid planning tool to protect the house from future liens if the homeowner were to apply for Medicaid benefits. Now, though the primary home is not counted as an assessable asset on a Medicaid application, (as long as the applicant intends to return home or has a dependent living there), this particular life-estate transfer can be reversed and the State can place a lien on the property that must be satisfied before the property passes to heirs. All is not lost however; there could be other planning strategies available.

These recent changes demonstrate the importance of periodic estate planning reviews. If you are unsure how these changes may affect your estate and future financial planning, give us a call.