the $2,750,000 gift would have been $387,360, compared to $292,720.22
5. Consider making non-taxable gifts to reduce the Vermont taxable estate while preserving the Vermont estate tax exemption.
Not all gifts made during lifetime re- duce the Vermont estate tax exemp- tion. Specifically, annual exclusion gifts, currently $13,000 per donee, per year,23
will reduce the Vermont taxable estate at death without reducing the available Vermont exemption.24
Simi-
larly, direct payments for education tuition and medical care are exclud- ed.25
Example: Sally owns assets worth $3,000,000. Sally has five children and grandchildren. The oldest grandchild is enrolling in college; the annual tu- ition is $40,000. If she makes annual exclusion gifts to each of her descen- dants for three years, and pays for two years of the grandchild’s college edu- cation, she has virtually eliminated the exposure of her estate to the Vermont estate tax.26
If no gifts are made, and
her taxable estate is $3,000,000 at her death, the Vermont estate tax would be $112,500. If Sally’s assets appreci- ate in value between the date of the gift and the time of her death, the tax savings will be greater, although her remaining estate might increase into taxable territory again.
6. Federal gift tax considerations— “window” of opportunity in 2012? The federal gift tax exemption is cur- rently $5 million. Unless Congress acts, the exemption will return to $1 million in 2013. Some estate planning advi- sors are recommending that people with estates over $1 million consider making gifts this year to take advan- tage of the current exemption. While it is not entirely clear that such gifts would escape some form of direct or indirect taxation should Congress fail to act, Vermont residents considering this strategy should be aware of the additional incentives under Vermont
estate tax laws for making such gifts, as discussed above.
7. “Deathbed” gifts. Vermont currently has no “deathbed gift” rule; as long as the gift is com- pleted before death, it should be ex- cluded from the Vermont estate tax base, although there is no “case in point” on this question in Vermont.27 Some states, such as Maine, have changed their laws to include in the estate tax base any gifts made within a year of death.28 Due to the requirement that gifts must be legally binding or “complete” in or- der to be considered to have removed the asset from the donor’s taxable es- tate,29
made a gift of the stock to his children before death, and the asset is subse- quently sold, the Vermont and federal income tax liability could be as much as $240,000.30
the stock in the foreseeable future at the time of the gift, then time value of money considerations will also have to be taken into account.
Vermont Estate Tax Planning for non-Vermont Residents
it is advisable to plan for death-
bed gifts as far in advance of death as possible. In many cases, the do- nor may be too ill to accomplish the gift, in which case a properly drafted power of attorney must be in place to authorize an agent to make the gift. It should also be kept in mind that it may also take several days to effectu- ate the transfer of bank or investment account assets, raising the risk that the donor may die before the transfers can be completed. Before any gifts are made, the effect of the loss of the income tax basis ad- justment at death should be taken into account. The tax basis of a gift- ed asset “carries over” from the do- nor to the donee, exposing the donee to income tax on the gain when they sell the asset. For example, assume that a taxpayer owns publicly-traded stock worth $1 million that would be exposed to Vermont estate tax at an 11% rate, and the stock has an adjust- ed income tax basis of $100,000. If the taxpayer owns the stock at death, and it is subsequently sold at a time when there has been no post-mortem ap- preciation in value, no state or federal income tax would be due, and the Ver- mont estate tax would be $110,000. On the other hand, if the taxpayer
While nearly all of the considerations dis- cussed above will apply to non-Vermont residents, a few comments specifically di- rected to their situations are appropriate. The first observation to make is that in the majority of cases the property includ- ible in the “Vermont estate” will be a sec- ond home, or perhaps a parcel of land or commercial or residential rental real estate, with a situs in Vermont. It should be noted, though, that the Vermont estate tax also reaches tangible personal property (a boat, vehicles, airplane, etc.) if such property is located in Vermont at the time of the non- resident owner’s death.31 Gifting
It should be apparent that, in the absence
of a Vermont gift tax, non-residents should give particular attention to the possibility of making gifts of their Vermont assets prior to their deaths, and/or moving any valuable tangible personal property out of the state prior to death. In second home situations, it may be appropriate to consider a qualified personal residence trust (“QPRT”), if the owners want to retain use and enjoyment of the property for a period of time. Creation of a QPRT will result in a completed gift of the remainder interest in the property,32 typically to the children, and will therefore be out of the Vermont transfer tax system.
Assets
Acquisition and Titling of Vermont In some cases, the manner in which an
interest in Vermont property is acquired or held could be critical with respect to the application of the Vermont estate tax. This is because the “Vermont gross es- tate” of a nonresident is defined to specifi- cally exclude “the value of intangible per- sonal property owned by the decedent.”33 Technically, this definition not only excludes publicly-traded securities, but partnership interests, LLC membership interests, and stockholdings in entities that own Vermont property. This raises the obvious question of whether a nonresident could transfer a Vermont second home to an LLC, then transfer interests in the LLC to their children while retaining a membership interest for themselves, and thereby avoid the Vermont estate tax. While the authors could find no authority addressing this issue in Vermont, it seems possible, if not likely, that the Ver-
30 THE VERMONT BAR JOURNAL • SUMMER 2012
www.vtbar.org
If there is no plan to sell
Planning for the Vermont Estate Tax
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