ple in the first scenario described above. Since assets passing to a surviving same- sex spouse now qualify for the full estate tax marital deduction under Vermont law,11 in the absence of a bypass trust plan, such couples could lose the tax benefit of one or both spouses’ Vermont estate tax exemp- tions, depending upon the size of their es- tate. Same-sex civil union or married cou- ples living in Vermont with combined assets near or above $2.75 million should visit with a qualified estate planning professional to review their plans if they haven’t been re- viewed since “de-coupling” occurred in 2009.
Trust Drafting and Funding Considerations
Importance of Splitting Estates As illustrated above, in cases where the total value of a couple’s assets is not like- ly to be greater than $5,500,000, Vermont and federal estate taxes can be effective- ly minimized by using a “standard” bypass trust plan, so long as ownership of the as- sets is divided fairly equally between the two of them.
For combined estates in the $5,500,000 to $7,750,000 range, achieving the most optimal tax result requires “needle thread- ing” between the Vermont and federal ex- emptions, taking into account federal ex- emption portability and the effect of Ver- mont’s marginal tax rates, as well as the
exemption “cliff”. Each situation has to be evaluated on a case-by-case basis, as will become apparent from the discussion which follows.
QTIP Trust Planning The greatest planning difficulties at pres- ent spring from the unpredictability of the estate tax laws, the possibility of changes in the values of assets, and the difficulty in valuing some assets, which could all cause less than optimum federal and/or Vermont tax results from any particular bypass trust funding formula, depending upon the tim- ing of deaths. In this environment, the abil- ity of trustees and executors to determine the amount to fund into the bypass trust at the time of the death of the first spouse could be critical. For this reason, drafting the bypass trust so that it may qualify for a partial qualified terminable interest proper- ty (QTIP) election may be particularly help- ful. A properly drafted QTIP trust will only qualify for the marital deduction to the ex- tent the trustee or executor affirmatively elects (by claiming the marital deduction on the federal estate tax return), and the elec- tion may be made with respect to all or a portion of the trust assets.12
In this way, a
trustee could determine the amount of as- sets in the bypass trust that will utilize the decedent’s estate tax exemption based upon the facts known at that time. Let’s look again at the example we dis-
cussed above, regarding the couple with assets of $7,080,000, who divided their as- sets equally, and who have a “standard” by- pass trust plan. As we have already men- tioned, when the first spouse dies, the “typical” funding formula would result in $3,540,000 of assets passing to the bypass trust, an amount that would be sheltered from federal estate tax under current law, but that would expose them to the Vermont estate tax in the first estate, and probably the second, as well. However, if the bypass trust were drafted so as to qualify for the QTIP election,13
the trustee would have the
option to elect to qualify $790,000 for the marital deduction, leaving $2,750,000 to be sheltered by the Vermont estate tax exemp- tion and eliminating the potential Vermont estate tax. The decision would not be auto- matic. It would be necessary to perform an assessment of the potential for exposure to federal estate tax in the surviving spouse’s estate, including consideration of planning for charitable and non-charitable gifts that could reduce such exposure. There would also be income tax considerations, as dis- cussed below. The analysis could be com- plex, and subject to many uncertainties, but it is likely that any assessment will be easi- er after the death of the first spouse than while both spouses are living.
As noted at the beginning of this article,
there is no separate, Vermont level, QTIP election allowed under Vermont law; any
www.vtbar.org
THE VERMONT BAR JOURNAL • SUMMER 2012
27
Planning for the Vermont Estate Tax
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