Welcome to PLDO’s new Trust & Estate newsletter, Trust MATTERS! 

We’ve overhauled the antiquated newsletter model to provide you with a fresh approach for delivering interesting and informative articles that can actually improve your estate planning strategies and help you achieve your goals.

Estate planning is unique for each individual, family and closely-held business. From our Rhode Island to our South Florida office, our team of attorneys have deep and diverse experience, and are well-versed in the nuances of each state’s trust and estate laws. We hope you enjoy this bimonthly addition to your inbox and know that we are available anytime to discuss your estate planning, administration and litigation needs.

By: Bernard A. Jackvony, Of Counsel

“A person doesn't know how much he has to be thankful for until he has to pay taxes on it.” 

This anonymous quote is timely.  It is rumored that the Rhode Island Division of Taxation (“the Division”) is reviewing its procedures for determining whether a Rhode Islander has validly changed his domicile to another state.  Domicile is the permanent residence of a taxpayer.  Persons domiciled in Rhode Island pay Rhode Island income taxes and their estates are subject to Rhode Island’s estate tax.

Like so many taxpayers looking for tax relief, Florida is a major destination.  Aside from the weather and other lifestyle benefits, the Sunshine State has neither an income tax nor estate tax.  The exodus from Rhode Island to Florida costs Rhode Island and other high tax states significant revenue loss.

In assessing whether a former Rhode Islander has validly changed domicile, the Division applies a two-prong test:

First, does the former Rhode Islander maintain a physical abode in another state? 

Second, does that person intend to permanently stay in the new location? 

There are state laws and court cases that address issues to determine the intent, including time spent during the tax year in the new domicile versus Rhode Island.  For income tax purposes, that will be an annual assessment.  For estate tax purposes, it will be determined at the time of death.  Factors that the Division will look at include: where the majority of personal property is located; voter registration; driver license; and recitation of place of domicile in documents, such as wills, trust and other legal documents. 

However, former Rhode Islanders can maintain a place of abode in the Ocean State and continue to use Rhode Island professional advisors for legal, accounting, insurance and medical services without those acts being taken into consideration in determining one’s domicile.

Our Florida office has a long history of helping former Rhode Islanders to establish and maintain Florida domicile.  We assist in filing for homestead exemption, recording of affidavits of Florida domicile in official county records and other acts proving intent to be a Florida domiciliary.  Our everyday work on Florida’s estate and trust laws allows us to provide essential services to document and carry out your estate plan in Florida’s tax-friendly environment.

We continue to closely monitor efforts by the Division to question change of domicile and keep our clients updated on any developments. For questions or more information, please contact Bernard A. Jackvony at 401-824-5100 or bjackvony@pldolaw.com.

By: Gene M. Carlino, Partner

One never knows what corner the grim reaper lies behind. A final illness can often accelerate quickly and deprive a donor of adequate time to complete gifts for tax purposes that he intended to make.

In a recent federal court case, the Third Circuit Court of Appeals (Estate of DeMuth v. Commissioner, 3d Cir. July 12, 2023) affirmed a Tax Court ruling disallowing completed gift status for seven checks drawn and distributed to the gift recipients prior to death but not deposited by the recipients until after the actual date of the donor’s death. The Estate attempted to argue that completed gifts status was obtained when the checks were delivered to the recipients. The IRS argued, and the Court agreed, that the donor retained dominion and control over the gifts at the time of his death because he could have instructed his bank to issue a stop payment and regained control of the money.

What makes this case more frustrating for the estate was that the donor was incapacitated and physically not able to do this. But, because in theory he could have done so, the gifts were held to be incomplete.  The Court noted that although federal estate and gift taxes are governed by federal law, state law is used to determine when property interests effectively transfer. The relevant state law in this case, like the law in many states, provided that unless the check was issued in exchange for property or services rendered (which is never the case with a gift), there would be no repercussions to the donor if he instructed his bank to dishonor the checks.  Some states do recognize a legal theory known as gifts causa mortis, or gifts made in contemplation of death.  This theory requires proof of the donor’s subjective intent at the time of the gift and that he knew his death was impending and intended the gift to provide for the donee because of his impending death. However, proving subjective intent is often very difficult because it requires proof of what a person was actually thinking at the time of the gift. 

As result of decisions like this, the estate lost the benefit of the gift tax annual exclusion, which today is $17,000 per each gift recipient, and the gifts were pulled back into the decedent’s gross estate where they were subject to federal estate tax.  Interestingly, in this case the gifts were made by the donor’s agent under a durable power of attorney document. If the agent had the checks certified and delivered to the donees or transferred the funds electronically, the result may have been different, as under state law, it may have been too late to stop payment on the checks. The moral of the story is: time is precious. Donors shouldn’t wait to make that final gift and donees shouldn’t delay acquiring the funds. Have a question? Don’t hesitate to contact Attorney Carlino at 401-824-5100 or gmcarlino@pldolaw.com.

By: Leah A. Foertsch, Office Managing Partner, FL

A recent case brought to light the impact that a stock-purchase agreement and life insurance proceeds may – or may not - have on the valuation of a closely held company for estate tax purposes. In this case that caused a split between the 8th and 11th Circuits, the 8th Circuit Court of Appeal issued an opinion in June 2023, which will result in additional consideration and scrutiny given to stock purchase agreements funded by life insurance.

The company in question was owned by two brothers, Thomas and Michael.  Michael owned $77.18% of the company when he died, and Thomas owned the rest.  The brothers had a longstanding stock purchase agreement providing that the company would redeem the shares of the deceased shareholder and would do so by maintenance of a $3.5m life insurance policy on each brother.

At Michael’s death, the company received the $3.5m life insurance, and applied $3m to the purchase of Michael’s shares and $500k to operations.  Michael’s estate took the position that the shares were worth $3m, so while the company received the $3.5m, it immediately had an offsetting obligation to pay $3m.  The IRS took the position that the fair market value of the company should have included the proceeds, thus the company’s value was $6.86m, meaning Michael’s interest was around $5.3m.

The Court does not get into an analysis of what the result would have been if Thomas died first.  In other words, if the company received $3.5m for Thomas’ shares, would the same analysis have been used, and thus Thomas’ estate would only receive $1.6m in exchange, regardless of the amount of the policy?  In that case, the company’s value would have been enhanced by the balance of the life insurance proceeds.

What’s to be done?  While the brothers had a stock purchase agreement, they did not take the actions required on an annual basis relating to valuation.  However, even if they had, the 8th Circuit probably would not have been satisfied, since the actions required would not have resulted in a fixed or determinable price.  Companies and small business owners are thus advised, while the split between the Circuits continues, to have a conversation with their advisors. An even more prudent conversation should occur with the business owner’s corporate and estate planning attorneys all in the same room. Please don’t hesitate to contact our Boca Raton, FL office at 561-362-2030 with questions. Our estate planning attorneys collaborate with our corporate and business attorneys to comprehensively address any estate, corporate or tax issues that could arise.