Before reviewing strategies, every Vermont family with assets approaching $5 million must understand the basics. Vermont is one of only 12 states plus D.C. with a state-level estate tax. The rules are specific to Vermont, and the gap between Vermont's $5 million threshold and the federal $15 million threshold means many Vermonters owe Vermont estate tax but no federal estate tax.

⚖ STATUTE: 32 V.S.A. § 7442a — Core Vermont Estate Tax Rule A Vermont estate tax is imposed at a FLAT RATE of 16% on the Vermont taxable estate above $5,000,000. There is no graduated structure — the first dollar above $5M is taxed at 16%, and so is the last dollar. The $5M threshold has been unchanged since 2021.

Vermont Estate Tax	2026 Numbers
Threshold	$5,000,000 — no tax below this amount
Rate	16% flat on entire Vermont taxable estate above $5M
Filing trigger	Vermont-situs property AND gross estate + 2-yr gifts > $5M
Return due	9 months after date of death
Payment due	9 months (no extension for payment)
Portability	NOT available — each spouse has own $5M exemption
Gift add-back	Taxable gifts within 2 years of death added to estate

$  TAX SAVINGS TAX IMPACT AT VARIOUS ESTATE SIZES: Estate of $6M: VT tax = $160,000 (16% x $1M over threshold) Estate of $8M: VT tax = $480,000 (16% x $3M over threshold) Estate of $12M: VT tax = $1,120,000 (16% x $7M over threshold) Married couple, $10M combined, no planning: VT tax at survivor = $800,000

Three Strategies Covered in This Guide

1.     Strategy 1:  Credit Shelter Trust (AB Trust) — the cornerstone of Vermont planning

2.     Strategy 2:  Annual Exclusion Gifting Program — the simplest, safest strategy

3.     Strategy 3:  Irrevocable Life Insurance Trust (ILIT) — liquidity + tax removal

Strategy 1:  Credit Shelter Trust (AB Trust / Bypass Trust)

The Credit Shelter Trust (also called an AB Trust or Bypass Trust) is the single most important Vermont estate tax planning tool for married couples. It directly addresses Vermont's most significant planning problem: the lack of portability. By placing the first spouse's $5 million Vermont exemption into an irrevocable trust at death, couples can effectively double their Vermont shelter from $5 million to $10 million.

⚖  STATUTE: 32 V.S.A. § 7442a — No Portability; Each Estate Gets One $5M Exemption Vermont does not allow a deceased spouse's unused Vermont exemption to transfer to the surviving spouse. Without a Credit Shelter Trust, a married couple with a $10M estate will waste the first-to-die spouse's $5M Vermont exemption, resulting in $800,000 of avoidable Vermont estate tax at the surviving spouse's death.

Diagram 1: How a Credit Shelter Trust doubles Vermont estate tax protection for married couples from $5M to $10M.

How It Works

1.     At the first spouse's death, the estate is divided: the first $5 million flows into the Credit Shelter Trust (also called the B Trust or Bypass Trust), and the balance passes to the surviving spouse outright or into a Marital/QTIP Trust.

2.     The $5 million in the Credit Shelter Trust is sheltered from Vermont estate tax forever — it uses the deceased spouse's Vermont exemption. It does NOT pass to the surviving spouse directly, so it is NOT included in the surviving spouse's Vermont taxable estate.

3.     The Credit Shelter Trust can still benefit the surviving spouse (through income distributions, limited principal distributions for health/education/support) while keeping the assets outside the survivor's taxable estate.

4.     At the surviving spouse's death, only their own estate is subject to Vermont tax. With $5M in the Credit Shelter Trust already sheltered, the surviving spouse's own $5M exemption covers another $5M.

$  TAX SAVINGS EXAMPLE — $10M Combined Estate: WITHOUT Credit Shelter Trust: Survivor has $10M estate. VT tax = 16% x $5M = $800,000 WITH Credit Shelter Trust: $5M sheltered in trust at first death. Survivor has $5M estate. VT tax = $0 SAVINGS = $800,000 in Vermont estate tax

✔  PLANNING TIP The Credit Shelter Trust must be structured carefully for Vermont. It should be irrevocable, name the surviving spouse and children as beneficiaries, and specifically not include the surviving spouse's own assets. Vermont does not recognize portability, so the trust is the ONLY mechanism to use both spouses' Vermont exemptions. QTIP trusts (for the Marital share) can hold the excess and qualify for the unlimited marital deduction, deferring — but not eliminating — Vermont estate tax on amounts above $5M.

Strategy 2:  Annual Exclusion Gifting Program

The annual exclusion gifting program is the most universally accessible Vermont estate tax strategy — available to any Vermonter at any income level, without complex trust structures, without attorneys for each transaction, and completely safe from Vermont's two-year gift add-back rule. The key is starting early and being consistent.

⚖  STATUTE: 32 V.S.A. § 7402(14) — Annual Exclusion Gifts Are NOT Added Back Vermont's two-year gift add-back rule adds taxable gifts made within two years of death back to the Vermont taxable estate. Annual exclusion gifts are NOT taxable gifts under I.R.C. § 2503(b) — they are excluded from gift tax entirely. Therefore, annual exclusion gifts do NOT get added back under § 7402(14) regardless of when they are made, including immediately before death. This is a safe harbor for ongoing gifting programs.

Diagram 2: Annual exclusion gifting program — safe harbor from Vermont's 2-year gift add-back rule.

2026 Annual Exclusion Numbers

Who Gifts	Per Recipient Limit	Example: 4 Children + 4 Grandchildren	10-Year Total
Individual	$19,000	8 recipients x $19,000 = $152,000/yr	$1,520,000
Married Couple (gift-split)	$38,000	8 recipients x $38,000 = $304,000/yr	$3,040,000

•       additionally excluded under I.R.C. § 2503(e) and have no annual limit

•       Gifts to 529 college savings plans can be front-loaded (five-year election) up to $95,000/person in 2026

•       Annual exclusion gifts remove both the gifted amount AND all future appreciation from the Vermont taxable estate

$  TAX SAVINGS 10-YEAR PROGRAM EXAMPLE (Married couple, 4 children, 4 grandchildren): Annual gift: $38,000 x 8 beneficiaries = $304,000 per year 10-year total transferred: $3,040,000 Vermont estate tax saved: Up to $496,000 (if estate was above $5M threshold) Additional savings: All investment growth on gifted assets also leaves estate

Strategy 3:  Irrevocable Life Insurance Trust (ILIT)

Life insurance is frequently included in Vermont taxable estates at full face value — a policy owned by the decedent at death is included in the gross estate under I.R.C. § 2042. For large policies, this can push an otherwise under-threshold estate over Vermont's $5 million line, or significantly increase the Vermont estate tax above the threshold. An Irrevocable Life Insurance Trust removes the policy from the estate entirely.

⚖  STATUTE: I.R.C. § 2042 / 14A V.S.A. § 401 — Insurance Owned Outside Estate Life insurance proceeds are included in the decedent's gross estate if the decedent possessed incidents of ownership (owned the policy) or the proceeds are payable to the estate. If an ILIT owns the policy, the decedent has NO incidents of ownership, and the proceeds are NOT included in the Vermont or federal taxable estate. Key timing rule: The insured must transfer the policy MORE than 3 years before death for the ILIT to be effective. Policies transferred within 3 years of death are pulled back into the estate under I.R.C. § 2035.

Diagram 3: ILIT structure — how an Irrevocable Life Insurance Trust removes life insurance from the Vermont estate.

How the ILIT Works

5.     An irrevocable trust is created to own the life insurance policy on the grantor's life.

6.     The grantor makes annual gifts to the trust (using the $19,000 annual exclusion per beneficiary) to fund premium payments. Trust beneficiaries receive Crummey withdrawal notices to qualify gifts for the annual exclusion.

7.     When the insured dies, the life insurance proceeds are paid to the ILIT — NOT to the grantor's estate.

8.     Because the ILIT owns the policy, the proceeds are EXCLUDED from both the Vermont and federal taxable estate.

9.     The ILIT can then use the tax-free proceeds to: (a) purchase assets from the estate to provide liquidity for Vermont estate tax payment; or (b) distribute cash to heirs free of estate tax.

$  TAX SAVINGS ILIT EXAMPLE — $2M Life Insurance Policy: WITHOUT ILIT: Policy in estate. VT estate tax on policy = $320,000 (16% of $2M). WITH ILIT (created >3 yrs before death): Policy NOT in estate. VT tax on policy = $0. SAVINGS = $320,000 in Vermont estate tax. BONUS: ILIT can provide $2M in liquid cash to pay other Vermont estate taxes, avoiding forced sale of Vermont real estate.

This page covers Vermont estate tax planning strategies current as of March 28, 2026. It reflects the Vermont estate tax framework under 32 V.S.A. Chapter 190, the One Big Beautiful Bill Act (OBBBA, P.L. 119-21, signed July 4, 2025), and the Vermont Trust Code (14A V.S.A.).

⚠  DISCLAIMER  This page is for general informational and educational purposes only. It does not constitute tax or legal advice. Tax laws change frequently. Consult a licensed Vermont attorney and/or CPA before implementing any estate tax planning strategy. All examples are illustrative only.