Vermont Estate Tax: Top Planning Strategies

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Paul Sundin, CPA

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Vermont is one of 12 states that does have an estate tax. But unlike many of those states, it levies a flat tax rate of 16% rather than a typical progressive rate structure.

The estate tax exemption is $5 million. So any net estate assets that exceeds this amount will be subject to the tax.

For example, if someone passes away and has an estate valued at $6 million the tax would be levied on $1 million. This would be $160,000.

Fortunately, there are a variety of strategies that you can utilize to reduce your taxable estate. This includes gifting and valuation of certain real estate and business interests. A knowledgeable CPA can work with you to limit your estate tax exposure.

Vermont Estate Tax FAQ

If you have more than $3,400,000 in assets and do not plan to leave a large estate to your beneficiaries, you can avoid the Vermont Estate Tax. However, if you have less than $2.75 million in assets, you should consider estate planning and trust provisions.

This may be a more expensive process, but there are some ways to minimize the taxes. This guide will walk you through the different options available. By following these tips, you can minimize the amount of taxes due on your Vermont estate.

First, you should write your will. Intestate succession laws require that you leave a valid will. By law, your spouse automatically inherits your estate. If you have children, the spouse will receive the inheritance.

Otherwise, the children of the deceased will receive it, if you are married. If you do not leave a will, the children of your deceased spouse will be entitled to it. If you do not have children, then your surviving spouse will receive it.

Another option is to avoid estate taxes altogether. In this way, you can minimize your taxes, especially if you have small assets. For example, a person who has only $2.5 million in assets can avoid the Vermont estate tax.

The tax rate is 16%, but if your estate is worth more than that, you should make a will anyway. If you do not leave a will, you must still fill out a VT estate tax return. If you do not have a will, you can opt for a trust to handle the estate.

What is the federal estate tax?

The federal estate tax is often called the death tax. The IRS is trying to step up enforcement of the tax. 

In theory, the calculation is pretty simple. But in practice it is a bit more challenging.

The executor of the estate is in charge of calculating the estate tax and making sure all tax returns are filed. Obviously, they will typically hire a CPA and an estate attorney to do all the legwork.

The first step is to analyze and review all assets of the deceased. This includes everything from cars and boats to real estate and business interests. 

The complexity typically lies with the business interests and sometimes the real estate. Obviously, the goal is to reduce the estate value as much as possible.

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Once asset values are determined, the executor can deduct liabilities. This can further be reduced thanks to legal fees, accounting and tax fees, and other professional fees like appraisals. Finally, you can reduce it for funeral and burial expenses.

The final calculation is called net assets. Any net asset amount above the exemption limit is subject to a 40% tax rate. But be careful because many have called for an increase in the rate to 45%. So stay tuned.

Vermont Inheritance & Gift Tax

Vermont does not levy an inheritance tax. However, another state’s inheritance tax can apply to a resident of Vermont if someone living in the other state passes away. As an example, Kentucky does have an inheritance tax that will apply to all assets in the state, regardless of where the beneficiary lives. If you receive an inheritance from someone who lives in another state, make sure you check the laws of the state.

In addition, Vermont also does not have a gift tax. The federal gift tax limit is $15,000 annually for each recipient. Any gifts in excess of the exemption will count against your lifetime gift tax exemption.

How to Lower or Avoid the Vermont Estate Tax

The following are some planning strategies that you can implement to minimize your taxable estate. Make sure you consider the following:

  • Direct Medical and Tuition Payments 
  • Gifts Below Annual Exemption
  • Qualified Terminable Interest Property (QTIP)
  • Family Limited Partnerships (FLPs)
  • Donor-Advised Funds
  • Irrevocable Life Insurance Trust (ILIT)
  • Qualified Personal Residence Trusts (QPRTs) 
  • Grantor Retained Unitrusts (GRUTs)
  • 529 Plans
  • Grantor Retained Annuity Trusts (GRATs) 
  • Dynasty Trusts
  • Charitable Gift Annuity
  • Special Valuation of Farms and Businesses
  • Intentionally Defective Grantor Trust (IDGT)
  • Charitable Remainder Trusts (CRUT)
  • Grantor Retained Income Trusts (GRIT)

Who should consider estate planning?

While everybody should engage in a minimum amount of estate planning, there are some people who should should be especially concerned. People who have the following assets and life situations should discuss the above planning ideas with their CPA and estate attorney:

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

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