Was a nonresident decedent's less-than-100% interest in an LLC subject to Rhode Island estate tax or a Rhode Island estate-tax lien discharge when the LLC owned Rhode Island real estate?
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This page answers the general question as of 2015. Ask about yours and see what current Rhode Island tax law says, with citations.
Plain-English summary
A nonresident decedent's less-than-100% interest in an LLC was not subject to Rhode Island estate tax and did not require an estate-tax lien discharge, even though the LLC owned Rhode Island real estate. The decedent owned an LLC membership interest, not a direct interest in the LLC's specific real property.
The decedent and spouse had formed an LLC to hold one Rhode Island property and later gifted membership interests to their children. At death, the decedent retained less than all of the LLC and owned no other Rhode Island real or tangible personal property.
Rhode Island law treated an LLC membership interest as personal property and gave a member no interest in specific LLC property. The Division therefore classified the less-than-100% interest as intangible personal property. Because the decedent was not a Rhode Island resident, that intangible interest had no Rhode Island tax situs and was outside the Rhode Island estate tax.
The result would differ for a single-member LLC that was disregarded for federal tax purposes and had not elected corporate treatment. In that case, the entity would also be disregarded for Rhode Island estate-tax purposes, and the LLC's Rhode Island real-property value would be included in the nonresident owner's Rhode Island gross estate.
The ruling also distinguished Rhode Island residents. Its footnote states that a Rhode Island resident's less-than-100% LLC interest would be subject to Rhode Island estate tax as intangible property, though it would not be subject to the statutory lien imposed on real property.
What this means for you
Nonresident LLC owners
Ownership percentage and entity classification matter. This ruling protected a less-than-100% membership interest because it was intangible property owned by a nonresident; it did not extend the same treatment to a disregarded single-member LLC.
Estate planners and executors
Separate direct ownership of Rhode Island real property from ownership of an entity interest. The estate-tax lien rules apply to real property owned by the decedent, while this minority LLC interest required no lien discharge.
Rhode Island residents
Do not apply the nonresident result. The ruling expressly said a resident's minority LLC interest would be included in the Rhode Island estate tax as intangible property.
Common questions
Did the LLC's Rhode Island real estate make the minority membership interest taxable? No. A member had no interest in specific LLC property, so the less-than-100% membership interest was treated as intangible personal property.
Why did the decedent's nonresident status matter? Rhode Island did not assign tax situs to a nonresident's intangible personal property under the rule applied in the order.
Was an estate-tax lien discharge required? No. The decedent did not directly own the Rhode Island real estate, and the minority LLC interest was not subject to Rhode Island estate tax.
What if the decedent owned 100% of a disregarded LLC? The Division said the LLC would be disregarded and the Rhode Island real-property value would be included in the nonresident decedent's Rhode Island gross estate, absent a corporate tax election.
What if the decedent was a Rhode Island resident? The minority LLC interest would be subject to Rhode Island estate tax as intangible property, but not to the statutory real-property lien.
Citations and references
- R.I. Gen. Laws § 44-22-1.1(b) and (e) — Rhode Island estate tax and property tax situs.
- R.I. Gen. Laws § 7-16-34 — LLC membership interests are personal property, and members have no interest in specific LLC property.
- R.I. Gen. Laws §§ 44-23-13 and 44-23-14 — estate-tax lien on Rhode Island real property and lien discharge.
Source
- Landing page: Rhode Island Declaratory Rulings
- Declaratory order: Declaratory Order 2015-01
Original ruling text
Ruling Request No. 2015-01
Ruling Request No. 2015-01
Request for Ruling Regarding the Inclusion of LLC Interests in a Decedent's Rhode Island Gross Estate
You request a ruling regarding the inclusion of limited liability company interests in a decedent's Rhode Island gross estate.
Facts
The facts set forth herein are taken from the statement of facts presented in the request for ruling.
Decedent was a nonresident of Rhode Island at the time of her death. Decedent and her spouse formed a limited liability company (LLC) to hold a piece of real property located in Rhode Island. Over a period of time, decedent and her spouse gifted interests in the LLC to their children. Decedent retained an interest in the LLC at her death. Aside from the LLC interest, decedent owned no tangible personal property or real property in Rhode Island.
Ruling requested
Notwithstanding any ruling in any pending case to which the Division is a party, whether an interest in an LLC containing Rhode Island real property is subject to the Rhode Island estate tax and is required to obtain a Rhode Island estate tax lien release.
Discussion
R.I. Gen. Laws 44-22-1.1 imposes a tax on the transfer of the net estate of every resident or nonresident decedent as a tax upon the right to transfer. If a decedent's estate contains property having a tax situs not within this state, the tax determined is reduced to reflect the ratio of Rhode Island property to the total gross estate. R.I. Gen. Laws 44-22-1.1(b).
Property has a tax situs within the state of Rhode Island if (1) it is real estate or tangible personal property and has actual situs within Rhode Island or (2) it is intangible personal property and the decedent was a resident. R.I. Gen. Laws 44-22-1.1(e). Whether an interest in an LLC owning real property in Rhode Island is includible in a non-resident decedent's Rhode Island gross estate depends on whether that interest is considered intangible personal property, tangible personal property or real property.
R.I. Gen. Laws 7-16-34 provides that, while a membership interest in an LLC is personal property, a member has no interest in specific limited liability company property. Accordingly, for Rhode Island estate tax purposes, a less than 100% member interest in an LLC is considered intangible personal property. Pursuant to R.I. Gen. Laws 44-22-1.1(e), the intangible personal property of a nonresident is not subject to the Rhode Island estate tax. As a result, a less than 100% interest in an LLC containing Rhode Island real property, owned by a nonresident, would not be subject to the Rhode Island estate tax.1
In contrast, an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it affirmatively elects to be taxed as a corporation for federal tax purposes. If no election is made to treat a single member LLC as if it were a corporation, the LLC would be disregarded for Rhode Island estate tax purposes and the value of the real property would be included in the nonresident decedent's Rhode Island gross estate under R.I. Gen. Laws 44-22- 1.1 (e).
Finally, all Rhode Island real property owned by a decedent at the time of death is subject to a statutory lien imposed under R.I. Gen. Laws 44-23-13. A discharge of the estate tax lien is necessary to transfer the property and can be obtained by the payment of all estate taxes due the State of Rhode Island. R.I. Gen. Laws 44-23-14.
Ruling
Based on the facts provided, the nonresident decedent's less than 100% interest in the LLC is not subject to the Rhode Island estate tax and, consequently, would not require an estate tax lien discharge.
This ruling may be relied upon by the Taxpayer and shall be valid until expressly revoked or until the applicable statutory provisions of law are amended in a manner that requires a different result or the underlying facts described herein change.
**David M. Sullivan
Tax Administrator
March 20, 2015**
1It should be noted that the analysis would change in the case of a Rhode Island resident since the intangible property of Rhode Island residents is subject to the estate tax under R.I. Gen. Laws § 44-22-1.1(e). A Rhode Island resident's less than 100% interest in an LLC would be subject to the Rhode Island estate tax but not the statutory lien on real property imposed under R.I. Gen. Laws § 44-23-13.
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