August 7, 2026
2:59 pm

Life Settlements for Rhode Island CPAs and Tax Professionals: A 2026 Practice Guide

For a Rhode Island client, the state estate tax is usually a bigger factor in whether a policy should be sold than the income tax on the proceeds. Rhode Island is one of a shrinking group of states that still imposes its own estate tax, and its threshold is one of the lowest in the country — in the neighborhood of $1.8 million for recent years, indexed annually, against a federal exclusion set at $15 million per decedent for 2026. That gap means a meaningful number of ordinary Rhode Island households with a house, a retirement account, and a life insurance policy are exposed at the state level and nowhere near exposed federally.

That matters because it changes the answer. If a policy is genuinely providing liquidity for a Rhode Island estate tax and is properly owned outside the taxable estate, selling it converts a tax-free, estate-excluded death benefit into a currently taxable receipt inside the estate. Ownership is the fulcrum, and it is a question the client will not think to ask.

Rhode Island also regulates these transactions in two layers — a statute and a separate administrative regulation — which gives a practitioner an unusually concrete checklist. This guide is written for the CPA, EA, or tax attorney: the statutory frame, the federal computation, and the Medicaid interaction, in the order they usually come up.

In This Article

Two layers of Rhode Island regulation
The Rhode Island estate tax, and why it can argue for keeping the policy
Adjusted basis after the 2017 repeal
Three tiers, and the Rhode Island rate on each
Forms 1099-LS and 1099-SB, and transfer for value
Medicaid, EOHHS, and the cost that starts the conversation
Frequently Asked Questions

Life Settlements for Rhode Island CPAs and Tax Professionals: A 2026 Practice Guide

Two layers of Rhode Island regulation

The regulator is not a standalone insurance department. Insurance in Rhode Island is overseen by the Insurance Division of the Department of Business Regulation, which also regulates banking, securities, and a range of licensed trades. Practitioners moving from Massachusetts or Connecticut sometimes look for a department of insurance that does not exist under that name.

The statute is the Life Settlements Act at Title 27, chapter 27-72 of the Rhode Island General Laws. Its stated purpose is to establish standards and procedures for licensing life settlement brokers and providers, to govern their conduct, and to set standards for contract forms, disclosures, and advertising in Rhode Island. Section 27-72-2 carries the definitions, 27-72-11 the general rules, 27-72-13 the prohibited practices, 27-72-15 the injunction and civil remedy provisions, and 27-72-16 the penalties.

The second layer is administrative. Under the rulemaking authority at R.I. Gen. Laws section 27-72-12, the Department of Business Regulation promulgated a Life Settlements regulation codified in the Rhode Island Code of Regulations at 230-RICR-20-60-10. That regulation is where the operational detail lives, and it is the document to consult when a question turns on the form of a disclosure or the timing of a step rather than on a broad statutory principle.

For your workflow the two layers translate into three checks before a client signs: confirm the provider and any broker hold current Rhode Island licenses; confirm the required disclosures were delivered in writing and are in the client’s file; and read the contract’s rescission provision rather than assuming a period applies. Section numbering does change, so pull current text from the General Laws and the RICR rather than a compliance summary, or confirm with the Department. The client-facing version is on our page on life settlement licensing in Rhode Island.

The Rhode Island estate tax, and why it can argue for keeping the policy

Rhode Island imposes an estate tax with a threshold that is indexed each year and has sat in the range of roughly $1.8 million for recent decedents, with a top rate of 16%. Rhode Island does not impose a separate inheritance tax. Confirm the current-year threshold with the Rhode Island Division of Taxation before relying on it, because the figure moves annually and the mechanics involve a credit rather than a simple exemption, which produces sharper behavior right at the threshold than practitioners expect.

The federal exclusion was set at $15 million per decedent for 2026 under the 2025 federal legislation and is indexed thereafter, so the state and federal thresholds are roughly $13 million apart. In a state with Rhode Island’s property values and an older-than-average population, that gap catches a lot of ordinary estates.

The practical consequence for a settlement analysis is that you have to ask who owns the policy before you evaluate whether to sell it. If the policy is owned by an irrevocable life insurance trust or otherwise structured to sit outside the taxable estate, and the estate is actually exposed to the Rhode Island tax, the death benefit is doing real work: it is income tax free under IRC section 101(a) and outside the taxable estate. Selling it converts that into a currently taxable receipt that lands inside the estate and may itself be taxed at 16% at death. That is usually a bad trade and it is the honest answer even though it means no transaction.

If the policy is owned personally, the death benefit is already includible in the Rhode Island taxable estate, and the analysis is entirely different — a sale converts an includible asset into cash the client can spend, which can reduce the taxable estate rather than complicate it. The trust mechanics are covered on our page about selling an ILIT or trust-owned policy.

Adjusted basis after the 2017 repeal

Revenue Ruling 2009-13 required a seller’s basis in a life insurance contract to be reduced by cumulative cost-of-insurance charges. That reduction inflated gain, and it made a sale more heavily taxed than a surrender of the same contract, because the companion surrender ruling imposed no equivalent reduction.

Section 13521 of the Tax Cuts and Jobs Act amended IRC section 1016(a)(1)(B) to eliminate the adjustment, retroactive to transactions entered into after August 25, 2009. Adjusted basis is now cumulative premiums paid, reduced by cash dividends received, partial surrenders, and untaxed distributions, and not reduced by mortality or cost-of-insurance charges. Practice worksheets and software modules built before 2018 sometimes still apply the old rule; verify the computation by hand on the first settlement you handle.

Documenting basis is the actual work. Request the full premium history and the carrier’s stated investment in the contract in writing. Where the contract came through a section 1035 exchange, basis carries over from the surrendered policy and the current carrier’s records normally begin at the exchange date, so the pre-exchange premiums have to come from the prior carrier. And gross up for policy loans: where a loan is repaid at closing, the amount realized is the gross settlement price. A $300,000 sale with a $65,000 loan payoff is a $300,000 amount realized against a $235,000 wire, and the information return will report the gross.

Item	Rhode Island position
Statute	R.I. Gen. Laws Title 27, ch. 27-72 — Life Settlements Act
Regulation	230-RICR-20-60-10, adopted under R.I. Gen. Laws sec. 27-72-12
Prohibited practices / penalties	Sections 27-72-13, 27-72-15, 27-72-16
Regulator	Insurance Division, Department of Business Regulation
State estate tax	Yes — threshold near $1.8M, indexed; top rate 16%
State inheritance tax	None
Income tax on both taxable tiers	Graduated, top marginal 5.99%; no capital gains preference
Median semi-private nursing facility cost	Roughly $11,000–$12,500 per month in recent surveys

Three tiers, and the Rhode Island rate on each

Federally, the payment splits in a fixed order: basis recovery first and tax-free; then ordinary income equal to the excess of the policy’s cash surrender value over adjusted basis; then long-term capital gain for everything above the cash surrender value, reported on Form 8949 and carried to Schedule D.

Example: a Providence client paid $190,000 in premiums, the cash surrender value at closing is $215,000, and the settlement pays $505,000. Basis recovery is $190,000, ordinary income is $25,000, long-term capital gain is $290,000. A surrender would have produced $215,000 and the same $25,000 of ordinary income — the $290,000 difference is invisible on any carrier document.

On the Rhode Island return, the individual income tax runs through three brackets with a top marginal rate of 5.99%, and Rhode Island provides no preferential rate for long-term capital gains. Both the ordinary income tier and the gain tier are taxed at the same graduated rates. That simplicity means Rhode Island offers no state-level timing arbitrage; the levers are federal.

Those federal levers are worth modeling. The gain tier is net investment income, so the 3.8% tax under IRC section 1411 applies above the statutory modified AGI thresholds. A one-year income spike also feeds the two-year lookback that determines Medicare IRMAA surcharges on Part B and Part D premiums, a genuine cost for a client in their seventies that rarely makes it into the initial conversation. Where the closing date is flexible, model December against January. The client-facing summary is on our page on life settlement taxes in Rhode Island.

Forms 1099-LS and 1099-SB, and transfer for value

IRC section 6050Y, added by TCJA section 13520 and implemented by final regulations at T.D. 9879, applies to reportable policy sales occurring after December 31, 2018. Form 1099-LS, Reportable Life Insurance Sale, is filed by the acquirer and furnished to the seller and the issuing carrier; it reports the gross amount paid. Form 1099-SB, Seller’s Investment in Life Insurance Contract, is filed by the issuing insurance company and reports the seller’s investment in the contract and the policy’s surrender amount — the two inputs for tiers one and two.

The 1099-SB is the form clients lose, because it arrives from the carrier months after the money moved and looks like routine policy mail. Request a duplicate rather than estimating, and reconcile the carrier’s investment-in-contract figure against your own reconstruction; the two diverge after a 1035 exchange or a block acquisition, and that difference is what a matching notice will ask about.

On transfer for value, IRC section 101(a)(2) makes the death benefit taxable to a transferee who acquired the policy for valuable consideration, above consideration paid plus the transferee’s subsequent premiums. TCJA section 13522 added section 101(a)(3), disabling the usual exceptions — carryover basis and transfers to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer — for a reportable policy sale. That is the institutional buyer’s exposure.

The client’s exposure is the private transaction alongside it: an adult child buying a parent’s policy, a professional practice restructuring a buy-sell, a policy assigned to an LLC for consideration. Each raises section 101(a)(2) on facts that will not appear on the policy, and each belongs in a memo. Running the other way, IRC section 101(g) excludes amounts received on a sale to a licensed viatical settlement provider where a physician certifies the insured is reasonably expected to die within twenty-four months, with a narrower per diem-limited exclusion for chronically ill insureds under section 7702B(c)(2). The provider’s license is a condition of the exclusion, so verify it with the Department of Business Regulation.

Medicaid, EOHHS, and the cost that starts the conversation

Rhode Island Medicaid is administered through the Executive Office of Health and Human Services, and the state operates its Medicaid program under a comprehensive section 1115 demonstration that consolidates coverage authorities, including long-term services and supports. Confirm current eligibility figures with EOHHS rather than a national chart; demonstration terms are renegotiated periodically and the details move.

The policy rules are federal and they are the operative ones. Under 20 C.F.R. section 416.1230, the cash surrender value of life insurance is a countable resource unless the total face value of all policies on that insured is $1,500 or less, in which case the cash value is excluded outright. Term insurance with no cash value is not a resource. And the sequencing rule that families most often invert: a sale at fair market value is not an uncompensated transfer and does not create a penalty under the sixty-month look-back, but the proceeds become a countable resource in the month after receipt. Solving a premium problem in March can create an eligibility problem in April if nobody has planned the spend-down. That sequence is set out on our page on the Medicaid look-back and selling a policy.

On cost, recent published cost-of-care surveys put Rhode Island’s median semi-private nursing facility rate in the range of roughly $11,000 to $12,500 per month. Rhode Island’s hospital landscape consolidated further when Lifespan was renamed Brown University Health in 2024; the other major system is Care New England. Those are the two organizations whose discharge planners will be involved when a client’s family is making this decision under time pressure.

For your file, request the policy cover page showing form number, issue date, face amount, and owner; the most recent in-force illustration; the complete premium history; and the current loan balance. Pine Lake Life Solutions provides education and a free policy review and does not purchase policies. We do not provide legal, tax, or investment advice — that is your engagement, and this page is written to support it. If an independent read on whether a client’s contract would attract market interest would help before you build a projection, the review is free at (305) 209-7183.

Frequently Asked Questions

Where is Rhode Island’s operational detail on life settlements written down?

In two places. The statute is the Life Settlements Act at R.I. Gen. Laws chapter 27-72, and the Department of Business Regulation adopted an accompanying Life Settlements regulation codified at 230-RICR-20-60-10 under the rulemaking authority in section 27-72-12. When a question turns on the form or timing of a disclosure rather than a broad principle, the regulation is usually the controlling document.

Should a Rhode Island client with a trust-owned policy sell it?

Often not. Rhode Island’s estate tax threshold is near $1.8 million and indexed, far below the federal figure, so many ordinary Rhode Island estates are exposed. A policy properly owned outside the taxable estate delivers an income tax free death benefit that is not subject to that tax. Selling converts it into a taxable receipt inside the estate. Test ownership before anything else.

Does Rhode Island tax capital gains at a lower rate?

No. Rhode Island’s individual income tax runs through graduated brackets topping out at 5.99% and provides no preferential treatment for long-term capital gains. Both the ordinary income tier and the capital gain tier of a settlement are taxed at the same state rates, so any timing advantage has to be found on the federal return rather than the Rhode Island one.

Which agency licenses providers and brokers in Rhode Island?

The Insurance Division of the Department of Business Regulation. Rhode Island has no separately named department of insurance, which surprises practitioners coming from neighboring states. That division licenses providers and brokers under chapter 27-72, approves forms and disclosures, and takes consumer complaints, so it is the right place to verify a counterparty before a client signs anything.

How do I compute basis for a policy that has been in force since the 1990s?

Request a complete premium history and the carrier’s stated investment in the contract in writing, and allow real time for the response. Adjusted basis is cumulative premiums paid less cash dividends, partial surrenders, and untaxed distributions, and it is no longer reduced by cost-of-insurance charges. If the contract came through a 1035 exchange, obtain the prior carrier’s history as well.

Does a life settlement create a Medicaid transfer penalty?

A sale at fair market value is not an uncompensated transfer, so it does not create a penalty under the sixty-month look-back. The problem is the cash: proceeds become a countable resource in the month after receipt and can defeat eligibility unless a spend-down is planned. Coordinate closing timing with the application timeline instead of treating them as separate matters.

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