Vermont Estate tax
Vermont Estate Tax Guide:

Vermont Estate Tax Planning Vermont Estate Tax Planning

Vermont Estate Tax Planning

Vermont Estate Tax Planning — Reduce Exposure & Build Flexibility

Author: Alexander Foelsche, CPA (US), WP (DE), RE (CH)
Article Date: October 15, 2025

Get help: Vermont Estate Tax Service (fixed-fee)

Introduction

Vermont imposes a stand-alone state estate tax that generally conforms to federal definitions of the taxable estate, with state-specific adjustments such as a two-year gift add-back. Effective Vermont estate tax planning focuses on reducing the taxable base, allocating who bears the tax (apportionment), and timing lifetime transfers. In addition, fixed-fee planning services are available for residents and nonresidents who want professional guidance.

This planning overview complements the full Vermont Estate Tax Guide and related topics such as nonresident filing, forms & deadlines, and the Vermont estate tax calculator.

Key Planning Instruments

  • Lifetime gifting (outside the add-back window) — Move appreciating assets out of the estate well before death. Consider annual exclusion gifts, tuition or medical payments made directly, and strategic use of the federal lifetime exclusion. Coordinate with Vermont’s gift add-back rules.
  • Credit Shelter Trust (CST) — Use a bypass trust to utilize exemptions and keep future growth outside the survivor’s estate while retaining income flexibility.
  • Marital Deduction & QTIP Elections — Defer tax on the first death and control ultimate disposition; Vermont follows federal QTIP elections with some distinctions.
  • Disclaimer Planning — Build disclaimers into the will or revocable trust to redirect assets after knowing actual values and laws at death.
  • Charitable Transfers — Use outright bequests, Donor-Advised Funds, or split-interest trusts (CRTs/CLTs) to reduce both Vermont and federal taxable estates.
  • Irrevocable Life Insurance Trust (ILIT) — Exclude death benefits from the taxable estate while providing liquidity to pay taxes efficiently.
  • Grantor Trust Freezes (GRATs, Sales to IDGTs) — Shift future appreciation to heirs at reduced cost; suitable for fast-growing assets or family businesses.
  • Family Entity & Valuation Discounts — Establish FLPs/LLCs to centralize management and support valuation discounts (lack of control or marketability).
  • Beneficiary Designations — Review TOD/POD, retirement, and insurance designations to align with Vermont apportionment and liquidity goals.
  • Apportionment Clauses — Specify who pays state estate tax (pro rata vs. residue) to avoid default outcomes for non-probate assets.
  • Basis Management (“Swap” Powers) — Use swap powers in grantor trusts to regain low-basis assets for step-up while keeping high-growth assets excluded.
  • Business Succession — Combine buy-sell agreements and recapitalizations to manage control, liquidity, and valuation for estate purposes.
  • Residency & Situs Review — Verify Vermont residency and situs exposure; align entity structures and records to minimize nonresident estate tax obligations.
  • Liquidity Planning — Stage liquidity sources (life insurance, credit lines, marketable securities) to fund estate taxes without forced sales.
  • Governance & Updates — Update estate plans as exemption amounts and Vermont statutes evolve; maintain appraisals and gift documentation.

Practical Notes & Coordination Tips

  • Coordinate state and federal filings; optimal federal planning may not minimize Vermont estate tax.
  • Start planning early — gifts made within two years of death can still be taxable in Vermont.
  • Define apportionment clearly in wills or trusts to prevent disputes among beneficiaries.
  • Engage tax counsel experienced in Vermont estate tax planning services for tailored modeling, compliance, and implementation.

For a complete overview of Vermont-specific rules, filing mechanics, and federal coordination, see our Vermont Estate Tax Guide.

Practical Vermont Estate-Tax Planning — How Growth Can Push You Over the $5M Line

Client snapshot (today): Vermont resident. Owns a home and two stock positions.
Home: FMV $3.0M, basis $2.0M. Stock #1: FMV $10.0M, basis $10.0M (no built-in gain). Stock #2: FMV $2.0M, basis $1.0M (built-in gain $1.0M).

Strategy A (optimized): Gift the “no-gain” asset; keep the gain assets for a step-up

  1. Now: Gift Stock #1 (the $10.0M, no built-in gain position) into an irrevocable trust. No income tax on the gift. The recipient/trust takes a carryover basis of $10.0M. Vermont has no gift tax, but beware the 2-year gift addback: taxable gifts within 2 years of death are added back into the VT estate. Plan early.
  2. Keep & bequeath: the home ($3.0M FMV; $2.0M basis) and Stock #2 ($2.0M FMV; $1.0M basis). At death, heirs receive a step-up in basis to FMV (IRC §1014). If they sell soon after, capital gains are near zero (sale costs aside).
  3. Vermont estate-tax target: After the gift, what remains ≈ $5.0M (home $3.0M + stock #2 $2.0M) → typically $0 VT estate tax so long as value at death stays ≤ $5.0M.
  4. Property Transfer Tax (PTT): VT’s PTT applies to real-estate transfers. By not transferring the home during life, you avoid PTT and keep the step-up. Gifting the home to a trust may trigger PTT (unless a specific deed/recipient exemption applies) and forfeits the step-up.

What if values grow?

Projection assuming the home grows at 3% p.a. and Stock #2 at 5% p.a.. We show the combined in-estate value (home + Stock #2), the excess over Vermont’s $5M exemption, and the corresponding VT estate tax at 16% on that excess.

Year Home @3% Stock #2 @5% Estate Total Over $5M VT Estate Tax (16%)
0$3,000,000$2,000,000$5,000,000$0$0
1$3,090,000$2,100,000$5,190,000$190,000$30,400
2$3,182,700$2,205,000$5,387,700$387,700$62,032
3$3,278,181$2,315,250$5,593,431$593,431$94,949
4$3,376,526$2,431,013$5,807,539$807,539$129,206
5$3,477,822$2,552,564$6,030,386$1,030,386$164,862
6$3,582,157$2,680,192$6,262,349$1,262,349$201,976
7$3,689,622$2,814,201$6,503,823$1,503,823$240,612
8$3,800,311$2,954,911$6,755,222$1,755,222$280,836
9$3,914,321$3,102,656$7,016,977$2,016,977$322,716
10$4,031,749$3,257,789$7,289,538$2,289,538$366,326

Planning note: If this projection pushes the remaining estate over $5M in future years, consider additional lifetime gifting (mind the 2-year addback), charitable split-interest planning, or other redesign. The goal stays simple: let step-up assets (with built-in gains) pass at death, and move no-gain/low-gain assets out of the estate during life to stay under Vermont’s line.

Strategy B (do nothing now)

All assets remain until death. Everyone receives a step-up, but the estate is ~$15.0M on these facts, generating Vermont estate tax of roughly 16% × ($15M − $5M) = $1.60M (plus potential federal estate tax depending on the federal exclusion at the time). Result: higher transfer-tax leakage versus Strategy A.

Cross-Border Example — Vermont & Germany (Why planning matters)

Assumptions (fixed):
Decedent domiciled in Vermont (U.S. resident). One child heir (no spouse/charity deductions; no debts). Assets at death (FMV / basis): Vermont real estate $10.0M / $5.0M; Germany real estate $10.0M / $5.0M (U.S. basis only; Germany uses historical cost — see Part B). Gross estate: $20.0M. Year of death: 2025. Currency shown in USD (Germany assesses in EUR at ECB rate).

A) At death — Estate / Inheritance taxes

  1. U.S. Federal estate tax. Taxable estate ≈ $20.0M − $13.99M = $6.01M; tentative federal tax ≈ 40% → ~$2.40M, pre-relief. Reliefs:
    • Foreign Death Tax Credit (IRC §2014): credit for German inheritance tax on the German asset, capped at tentative U.S. tax × (German asset / global estate) → $2.40M × (10/20) ≈ $1.20M.
    • State death tax deduction (IRC §2058): deductible VT estate tax reduces federal tax (form handles circularity). Near the top bracket, federal falls by ≈ 40% of the VT tax.
  2. Vermont estate tax. Exemption $5.0M; rate 16% above exemption → (20.0 − 5.0) × 16% = $2.40M. No credit for foreign death taxes; VT has its own base rules.
  3. Back to U.S. federal after VT. §2058 deduction effect ≈ $0.96M reduction. German death-tax credit limited to ~$1.20M. Federal result: ~$2.40M − $0.96M − $1.20M ≈ $0.24M.
  4. Germany — Inheritance tax (ErbStG) on the German real estate only. Limited tax liability (non-resident decedent). Child’s allowance €400,000 prorated under §16(2) by 10M/20M → €200,000. Illustrative base ≈ $10.0M − $0.2M = $9.8M; Class I rate at this band ≈ 23% → ~$2.254M German inheritance tax. Feeds the U.S. §2014 credit (capped at ~$1.20M). No impact on Vermont.

At-death totals: Germany inheritance ≈ $2.254M • U.S. federal (net) ≈ $0.24M • Vermont ≈ $2.40M → Total U.S. transfer taxes ≈ $2.64M (VT + federal), plus Germany ≈ $2.254M.

B) After death — Basis and sales a year later

  1. U.S. basis rule (IRC §1014): step-up — both properties’ U.S. income-tax basis becomes FMV at death = $10.0M each.
  2. Germany basis rule: no step-up. The heir steps into the decedent’s shoes: the historical cost basis and the holding period carry over.
  3. Illustrative sales 12 months later:
    • Sale prices: Vermont $10.8M → U.S. gain $0.8M (from $10.0M step-up). Germany $10.5M.
    • Variant A (Germany taxable, ≤ 10-year holding period under §23 EStG): German historical basis (example) $6.3M → German gain $4.2M → ~25% effective tax ≈ $1.05M. U.S. side: VT sale $0.8M × 23.8% ≈ $190.4k; DE sale U.S. gain $0.5M × 23.8% ≈ $119.0k, fully offset by FTC (credit capped at the U.S. tax on that foreign gain). Vermont taxes both gains at ordinary rates; no foreign tax credit.
    • Variant B (Germany tax-free, > 10-year rule met): Germany: $0 income tax. U.S. federal: $190.4k (VT sale) + $119.0k (DE post-death gain) ≈ $309.4k total. Vermont again taxes both gains (ordinary rates; no foreign credit).
Action reminder: Monitor the in-estate assets. If projected values push the Vermont estate above $5M, consider additional lifetime gifting (mind the 2-year addback), charitable split-interest planning, or other redesign. Cross-border cases add layers: coordinate death-tax rules with post-death basis/holding-period rules — they often point to different “optimal” moves.

This block is an educational illustration and not legal or tax advice. Rules change, and outcomes depend on your full facts (statutes in force at death/transfer, filing status, other assets/debts, deductions, appraisals, currency rules, documentation for credits, etc.).
Our U.S. CPAs and our German Wirtschaftsprüfer can advise you on your specific situation.