this technique. A trust agreement that gives the surviving spouse an interest for life, as a bypass trust does, neces- sarily has remaindermen who will take upon the surviving spouse’s death. Granting the surviving spouse a gen- eral power of appointment could re- sult in disenfranchising some or all of the remainder beneficiaries. Although the trustee could seek the consent of the remaindermen to grant the gener- al power, it may be difficult to obtain, particularly if achieving the ultimate tax benefits is uncertain. There is also the risk of a general power of appoint- ment being imputed to the surviv- ing spouse regardless of whether the trustee acts to grant the power, such as where the trustee is deemed to be “controlled” by the surviving spouse.
Gift Planning Techniques Benefits of Making Lifetime Gifts The benefits of making lifetime gifts are best analyzed by examining the separate impacts on gift planning of distinct features of the Vermont estate tax regime, while keeping in mind that in most cases some or all of these features may come into play si- multaneously. This discussion assumes that outright gifts are made; however, the host of more sophisticated gifting techniques that have been developed for federal es-
tate tax planning purposes could in most cases be employed with similar effects. 1. Taxable gifts reduce the Vermont es- tate tax exemption that would other- wise be available at death. As noted above, Vermont does not have a gift tax, but lifetime taxable gifts reduce any available Vermont estate tax exemption when calculat- ing the alternative federal estate tax element of the Vermont estate tax af- ter the donor dies. Example: Fred, a single individual, owns $5.5 million in assets. He makes a lifetime gift of $2,750,000 and subsequently dies with an estate of $2,750,000. The Ver- mont estate tax is $165,280, even though his estate was not more than the exemption amount.21
2. All taxable gifts from estates above $3.4 million will avoid Vermont estate tax on the value of the assets that are transferred during life. In the example above, if Fred had not made any gifts at all, the Vermont es- tate tax would have been $458,000, a difference of $292,720.
3. For estates in the $2.75 - $3.4 million range, the size of the gift required to achieve a Vermont estate tax savings decreases as the estate size increases. For an estate valued at $3.4 million, all but the smallest amount of gifts
will result in a Vermont estate tax sav- ings,
since the hypothetical feder- al tax is $227,500, whereas the Ver- mont estate tax on the same size es- tate is $225,360. Any gifts made pri- or to death will reduce the size of the Vermont taxable estate, resulting in a computed Vermont estate tax that is lower than the hypothetical fed- eral tax, which remains the same re- gardless of the amount of the gift (pri- or taxable gifts are added back for purposes of calculating the federal tax). For example, if a $400,000 gift is made prior to death, the Vermont estate tax on the $3 million estate at death is $187,280, while the hypo- thetical federal estate tax remains at $227,500.
On the other hand, an estate valued at $3 million would have to be reduced by more than $1,250,000 before the Vermont estate tax calculation result will be lower than the hypothetical federal estate tax liability of $87,500.
4. The tax benefit of gifting is greater for estates that would be taxed at higher marginal rates, both because the as- sets themselves are not taxed and be- cause the remaining taxable estate is taxed at lower marginal rates. If Fred’s total assets had been $10,000,000, the “benefit” of making
www.vtbar.org
THE VERMONT BAR JOURNAL • SUMMER 2012
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Planning for the Vermont Estate Tax
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