erations involved in drafting them. As ex- plained above, once the “cliff” is reached ($3,400,000), the theoretical federal tax li- ability ceases to be relevant.


No Separate Vermont “QTIP” Unlike a few states (e.g., Massachusetts),


there is no provision in Vermont law or reg- ulations for a separate, state level, “Quali- fied Terminable Interest Property” election; that is, a trust that fully utilizes the federal exemption cannot be partially QTIPed for Vermont purposes only in order to avoid the imposition of Vermont estate tax on the excess amount over the Vermont ex- emption while still getting the full benefit of the federal exemption for federal estate tax purposes.


Although it is not entirely clear at pres-


ent, representatives of the Vermont De- partment of Taxes have stated informally that Vermont will recognize whole or partial QTIP elections for properly drafted trusts as long as the election is, or would be, bind- ing for both federal and Vermont estate tax purposes. This matter is discussed in more detail below.


Tax Planning for Vermont Residents


Effect of the Vermont Estate Tax Exemption “Cliff” and Marginal Rates on “Typical” Estate Plans for Married Couples


Combined Estates with Assets Less than $2.75 Million10


Couples in this category, with estate plans that leave all their assets to each oth- er (via joint tenancy, beneficiary designa- tion, or will) do not currently have exposure to either federal or Vermont estate tax. On the other hand, couples with combined es- tates that bump against the $2.75 million “cliff” discussed above would be well-ad- vised to consider the planning techniques discussed below, including gifting options, to avoid the 35% Vermont estate tax on the value of assets over the exemption amount (and below the $3.4 million ceiling) when the last spouse dies. As the examples be- low will demonstrate, gifting can be advan- tageous even though a tax may still be in- curred. These couples should also seek pro- fessional advice annually to make sure that changes in the laws or in their financial situ- ation do not require revising their plan.


Combined Estates with Assets Over $2.75 Million


Combined estates greater than $2.75 mil-


lion are exposed to Vermont estate tax. The degree of exposure is a function of the size of the estate and the particular estate plan. Due to the variable impact of Vermont’s graduated rates, combined with the phase- out of the Vermont estate tax exemption,


26


In a “Bypass Trust Plan,” the assets of the first spouse are divided between two trusts, in such a way as to avoid payment of any es- tate tax, but so as to utilize the federal es- tate tax exemption of the decedent. Since it is usually not possible to predict the order of death, estate planners advise couples to divide ownership of their assets rough- ly equally, thus ensuring that each spouse’s exemption will be available to be utilized. In this situation, if each spouse owned $2,520,000 worth of assets, upon the death of the first spouse the Bypass Trust would be funded with that amount, because it is less than the $5,000,000 federal exemp- tion. Since there is a $2,750,000 Vermont estate tax exemption, there is no Vermont estate tax due upon the death of the first spouse. Additionally, if the surviving spouse does not own over $2,750,000 in assets upon their death, no Vermont or federal estate tax will be due at that time either. Thus, simply by having a “standard” estate plan in place, this couple would save over $400,000 in Vermont estate taxes. Now, let’s change the facts a little and assume that this couple has assets of $7,080,000, with the same “standard” by- pass trust estate plan, and that they have divided the ownership of assets so each has $3,540,000. As we have seen, upon each spouse’s death, their available feder- al exemption will be applied to their share of the assets, so no federal estate tax will be due upon the death of either spouse.


THE VERMONT BAR JOURNAL • SUMMER 2012 Federal Exempt Amt Deceased Spouse's Assets Remainder u


MARITAL TRUST (Income/Principal available for surviving spouse as needed, remainder to children) Subject to Federal Estate Tax upon surviving spouse's death.


However, because both estates exceed the $3,400,000 amount at which the Vermont estate tax exemption is phased out, each estate will be subject to Vermont estate tax of $238,800 ($477,600 total). Assuming the plan is written in a way so that the bypass trust is only funded with the Vermont ex- empt amount, that would leave $4,330,000 ($7,080,000 – 2,750,000) to be taxed in the surviving spouse’s estate (there would still be no federal estate tax, under current law), and the state tax would be $323,280, sav- ing $154,320. Through this technique, the benefits of the Vermont exemption can be utilized for one spouse. For combined es- tates greater than $7,750,000, in the ab- sence of federal estate tax exemption por- tability, the benefits of this technique are quickly outweighed by the federal estate tax cost of not fully utilizing both federal ex- emptions. As discussed below, a “Vermont QTIP” would be particularly useful in these situations.


Same Sex Married Couples and the Vermont Estate Tax


For same-sex married couples in Ver- mont, considerations around maximizing the utilization of each spouse’s exemption are not a factor where federal estate tax- es are concerned (due to the absence, at present, of a marital deduction at the feder- al level). It seems likely that currently many such couples simply leave all of the assets they own to each other, as with the cou-


www.vtbar.org u


it would be impossible in the space here to discuss all of the possible outcomes of var- ious plans, but the examples and illustra- tions below should serve to illuminate the considerations involved. To begin with,


let’s assume a couple


has a combined estate of $5,040,000 (this number is chosen for simplicity in apply- ing the Vermont tax table, and we will ig- nore the $60,000 deduction in arriving at the amount of the adjusted Vermont tax- able estate). Let’s further assume that upon the death of the first spouse, the surviving spouse receives all of the assets outright.


Because under federal and Vermont law there is no transfer tax imposed on gifts or bequests between married persons, no tax is imposed upon the first death. If we then suppose that the surviving spouse dies with an estate of $5,040,000, there is no Ver- mont exemption (having been phased-out at the $3,400,000 level) and the Vermont estate tax due is $402,800.


If this couple had executed a “typical” estate tax minimization plan several years ago, it would most likely look something like this upon the death of the first spouse.


BYPASS TRUST (Income/Principal available for surviving spouse's support & maintenance for life, remainder to children) NOT Subject to Federal Estate Tax upon surviving spouse's death.


Planning for the Vermont Estate Tax


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