Vermont Estate Tax

Vermont Estate Tax: What Every Vermont Family Needs to Know

Vermont imposes its own state estate tax, entirely separate from the federal estate tax, and it is one of the most aggressive in the country. With a threshold of just $5,000,000 and a 16% flat rate, Vermont's estate tax catches many families who would owe nothing federally. Many Vermont residents do not learn about the Vermont estate tax until it is too late to plan for it.

At Nicole Peck McPhee, PC, we help Vermont families understand their Vermont estate tax exposure and design plans that reduce or eliminate it, protecting the wealth you have spent a lifetime building.

•      Vermont Statute: 32 V.S.A. § 7442a

•      Vermont Exemption Threshold: $5,000,000 per person — estates above this amount owe Vermont estate tax

•      Vermont Estate Tax Rate: 16% flat rate on the taxable Vermont estate above $5,000,000

•      Vermont Marital Deduction: Transfers to a surviving U.S. citizen spouse are not subject to Vermont estate tax — same unlimited marital deduction as federal

•      No Portability: Vermont does NOT allow portability. A surviving spouse cannot use a deceased spouse's unused Vermont exemption. Each spouse's $5,000,000 exemption must be planned for and used independently, or it is permanently lost.

•      Vermont Return Deadline: Vermont estate tax return (Form E-1) is due nine months after the date of death

•      Who Must File: Vermont residents on their entire worldwide estate; non-Vermont residents on Vermont-situated real property and tangible personal property

Example: A Vermont estate of $8,000,000 owes $480,000 in Vermont estate tax (16% × $3,000,000 above the $5M threshold) — even if it owes $0 in federal estate tax.

The Vermont estate tax is calculated on the Vermont taxable estate, which is the gross estate minus allowable deductions. Allowable deductions include funeral and burial expenses paid from the estate, debts owed at the time of death, the value of property transferred to a surviving U.S. citizen spouse (the unlimited marital deduction), the value of property transferred to a qualifying charity, and federal estate taxes paid.

Vermont's $5,000,000 exemption is subtracted from the net taxable estate. The 16% flat rate is then applied to the amount above the threshold. Unlike the federal estate tax, Vermont does not use a graduated rate structure — the 16% rate applies to the entire taxable amount above $5,000,000.

Vermont Estate Tax — Calculation Examples

Vermont Estate Value	Amount Above $5M Threshold	Vermont Estate Tax Owed
$5,000,000	$0	$0
$6,000,000	$1,000,000	$160,000
$8,000,000	$3,000,000	$480,000
$10,000,000	$5,000,000	$800,000
$15,000,000	$10,000,000	$1,600,000

These calculations assume a single individual with no marital deduction and no charitable deductions. A married couple's Vermont estate tax exposure depends entirely on how their plan is structured.

Under federal law, if the first spouse to die does not fully use their exemption, the surviving spouse can elect to use the remainder — a concept called portability. This makes federal estate tax planning somewhat forgiving for married couples.

Vermont has no portability. A Vermont spouse's $5,000,000 exemption either gets used at their death — through a credit shelter trust or a direct bequest to non-spouse beneficiaries — or it is gone forever. There is no Vermont portability election. There is no do-over after the first death.

What Happens When Vermont Couples Don't Plan for No-Portability

•      Spouse #1 dies and leaves everything outright to Spouse #2 — no Vermont estate tax at the first death due to the marital deduction

•      Spouse #1's $5,000,000 Vermont exemption is permanently lost — it cannot be transferred to the survivor

•      Spouse #2 now owns the entire combined estate and has only their own $5,000,000 Vermont exemption to protect it

•      Everything above Spouse #2's $5,000,000 exemption is exposed to Vermont's 16% estate tax

•      A Vermont couple with a combined estate of $10,000,000 that leaves everything to the survivor could owe $800,000 in Vermont estate tax that a credit shelter trust would have eliminated entirely

The solution is a Vermont Credit Shelter Trust — a trust provision in the first spouse's estate plan that directs an amount up to the Vermont exemption into a trust at the first death, rather than passing outright to the surviving spouse. This uses the first spouse's Vermont exemption and keeps the trust assets outside the surviving spouse's taxable estate.

A Vermont Credit Shelter Trust, also called a Bypass Trust or A/B Trust, is the cornerstone of Vermont estate tax planning for married couples. It is structured so the first spouse's estate directs an amount up to the Vermont $5,000,000 exemption into a trust at death. The surviving spouse receives income from the trust and limited access to principal during their lifetime. The remaining estate passes outright to the surviving spouse, protected by the unlimited marital deduction. When the surviving spouse dies, the trust assets pass to the children completely free of Vermont estate tax, protected by the first spouse's exemption used at the first death.

Without this structure, the first spouse's $5,000,000 Vermont exemption is permanently wasted. A Credit Shelter Trust costs the couple nothing in Vermont estate tax at the first death and can save hundreds of thousands — or more — at the second death.

Vermont Estate Tax: With and Without a Credit Shelter Trust

Vermont Exemption: $5,000,000 per person — NOT portable

Facts: Husband (H) Vermont taxable estate $6,000,000  |  Wife (W) Vermont taxable estate $4,000,000  |  Combined: $10,000,000

WITHOUT Credit Shelter Trust	WITH Credit Shelter Trust
Husband (H) dies Vermont estate: $6,000,000	Husband (H) dies Vermont estate: $6,000,000
▼	▼
100% passes to Wife outright Vermont marital deduction applies H's $5M Vermont exemption — PERMANENTLY LOST	$5M → Vermont Credit Shelter Trust $1M → to Wife outright H's $5M Vermont exemption — USED ✓
▼	▼
Wife now owns: $6M + $4M = $10,000,000 Only W's $5M exemption remains	Trust: $5M — outside W's estate W's estate: $1M + $4M = $5,000,000 W's $5M exemption covers her estate
▼	▼
Wife dies Vermont taxable estate: $10,000,000 W's $5M exemption shelters $5M $5M exposed at 16%	Wife dies W's Vermont estate: $5,000,000 W's $5M exemption covers entire estate Trust passes tax-free ✓
▼	▼
VERMONT ESTATE TAX OWED $800,000 (16% × $5,000,000) H's $5M exemption — WASTED	VERMONT ESTATE TAX OWED $0 $10,000,000 to children — TAX-FREE Both $5M Vermont exemptions used ✓
Vermont estate tax calculated under 32 V.S.A. § 7442a. Vermont exemption: $5,000,000 per person; 16% flat rate; not portable. This example is for illustration only and does not constitute legal or tax advice. Consult Attorney Nicole Peck McPhee for advice specific to your Vermont estate.

How a Vermont Credit Shelter Trust Works — Illustration

The diagram below illustrates how the Credit Shelter Trust structure routes assets at the first death to use both spouses' Vermont exemptions, passing $10,000,000 to children entirely free of Vermont estate tax.

One of the most straightforward strategies for reducing Vermont estate tax exposure is reducing the size of your taxable estate during your lifetime through systematic gifting. Vermont does not impose a separate gift tax — gifts made during your lifetime reduce your Vermont estate without triggering a Vermont-level gift tax.

Annual Gift Tax Exclusion — Vermont Planning Tool

•      Annual Federal Gift Tax Exclusion (2026): $19,000 per recipient per year — these gifts reduce your Vermont taxable estate and are not subject to federal gift tax

•      Married Couple Gift-Splitting: Spouses can combine exclusions and give $38,000 per recipient per year — a couple with three children can remove $114,000 from their Vermont estate annually with no gift tax

•      Direct Medical Payments: Any amount paid directly to a medical provider for another person's expenses is not subject to gift tax and reduces your Vermont estate

•      Direct Educational Payments: Any amount paid directly to a qualified educational institution for tuition is not subject to gift tax and reduces your Vermont estate

•      Compounding Impact: A consistent annual gifting program over 10 to 20 years can meaningfully reduce a Vermont estate — a couple with four children removing $152,000 per year reduces their Vermont estate by over $1,500,000 in a decade

For Vermont residents with estates substantially above the $5,000,000 threshold — or with business interests, real estate, or appreciating assets that will grow the estate over time — Attorney McPhee deploys more sophisticated planning strategies alongside the Credit Shelter Trust and lifetime gifting program.

Trusts That Reduce Vermont Estate Tax Exposure

•      Vermont Credit Shelter Trust (Bypass Trust): The foundation of Vermont estate tax planning for married couples — uses the first spouse's $5,000,000 Vermont exemption at the first death rather than allowing it to be permanently lost.

•      QTIP Trust: A Qualified Terminable Interest Property trust provides income to the surviving spouse while directing the underlying assets to the grantor's chosen beneficiaries at the survivor's death. Can be structured to use the Vermont exemption while still protecting the surviving spouse.

•      Irrevocable Life Insurance Trust (ILIT): Removes life insurance proceeds from the Vermont taxable estate entirely. The ILIT owns the policy and receives the proceeds at death — outside the Vermont estate — providing liquidity to pay Vermont estate taxes or provide for family without adding to the taxable estate.

•      Spousal Limited Access Trust (SLAT): Allows one Vermont spouse to transfer assets irrevocably out of both spouses' Vermont taxable estates while the beneficiary spouse retains some indirect access to the funds.

•      Intentionally Defective Grantor Trust (IDGT): Removes assets from the Vermont taxable estate while allowing the grantor to continue paying income tax on trust earnings — effectively making additional tax-free transfers to beneficiaries over time as the grantor pays their tax bill.

•      Qualified Personal Residence Trust (QPRT): Transfers a Vermont home or vacation property out of the taxable estate at a reduced gift tax cost while the grantor retains the right to live there for a set term. Post-transfer appreciation also escapes Vermont estate tax.

•      Grantor Retained Annuity Trust (GRAT): Transfers appreciating Vermont assets — business interests, investment portfolios, real estate — out of the Vermont taxable estate without using the federal gift tax exemption. Growth above the IRS hurdle rate passes to heirs free of Vermont and federal estate tax.

•      Charitable Remainder Trust (CRT): Provides income to the grantor or family members for a specified period; the remainder passes to charity — reducing the Vermont taxable estate and generating income and charitable deduction benefits.

Entity-Based Valuation Discount Strategies

For Vermont families with closely held business interests, real estate portfolios, or investment assets, transferring those interests through a Family Limited Partnership (FLP) or LLC can achieve valuation discounts that reduce the Vermont taxable gift and estate value of the transferred interests. Because limited partnership and LLC membership interests carry transfer restrictions and limited management rights, the IRS recognizes that a minority interest is worth less than its proportionate share of underlying assets — typically 20% to 40% less. This discount means more assets can be transferred within Vermont's $5,000,000 exemption and annual gift exclusions.

At Nicole Peck McPhee, PC, we provide Vermont estate tax planning services to families throughout Vermont. Whether your estate is modestly above the $5,000,000 threshold or substantially larger, we design plans that use every available tool to reduce your Vermont estate tax exposure and protect what you have built.

We begin with a Peace of Mind Planning Session — a working meeting in which we review your assets, your family's circumstances, and your goals, and then explain your Vermont estate tax exposure and the strategies available to reduce it. No forms. No jargon. Just clear, honest guidance built around your family's real situation.

Contact Will and Trust Planning Today

For personalized advice on estate planning, including strategies to minimize or avoid probate, contact Will and Trust Planning today. Our experienced estate planning attorneys can help you understand your options, draft essential documents, and create a plan that protects your assets and achieves your goals.