mont Department of Taxes would take the position that the LLC membership interests of a nonresident decedent must be includ- ed in their Vermont gross estate in such in- stances. In doing so, they might refer to legislative intent as expressed in an analo- gous situation involving the land gains tax, which treats transfers of “shares in a cor- poration or other entity, or of comparable rights or property interests in any other form of organization or legal entity, which effectively entitles the purchaser to the use or occupancy of land” as a transfer of the land itself.34
While one could reasonably ar-
gue that legislative “intent” expressed with respect to one type of tax cannot be ex- tended to another type of tax without ex- press authority, how the Vermont Supreme Court might rule in such a case is unknown. Given the availability of other planning al- ternatives to nonresidents, particularly gift- ing techniques, it would not appear to be advisable to rely upon this method to avoid the Vermont estate tax. A final point: nonresidents consider-
ing purchasing a second home in Vermont should consider the option of acquiring the property in the form of a “joint purchase,” whereby the parents acquire a life estate in the property, with the remainder being pur- chased by their children. If structured cor- rectly, upon the deaths of the parents, the life estates will be extinguished, leaving nothing of value to be taxed in Vermont (or by the IRS). The specifics of this technique are beyond the scope of this article, but it could be useful, particularly where an ex- pensive piece of real estate is involved.
Conclusion
As can be seen, planning for the Vermont estate tax is a complex exercise, requiring an analysis of the size of the potential es- tates, the asset mix, income tax basis, age of the taxpayer, potential changes in the federal estate/gift tax laws, gifting oppor- tunities and risks, and other factors unique to the taxpayer’s personal situation. Need- less to say “one size fits all” estate plans and formulas are not likely to achieve the goal of minimizing exposure to the Ver- mont estate tax, although as discussed above, there are a limited number of spe- cific techniques that could be successfully employed in appropriate situations. ____________________ Ron Morgan, Esq. is a tax attorney with Kenlan, Schwiebert, Facey & Goss, P.C. His practice is focused on advising individu- als and businesses with respect to a wide range of issues relating to business forma- tion and reorganization, business succes- sion planning, estate planning and admin- istration, trusts, and charitable giving. He has provided advice to private foundations and public non-profits, and he also repre-
www.vtbar.org
sents individuals and businesses involved in tax disputes with the IRS and state/local taxing authorities. Matt Getty, Esq. is an associate attor- ney in the tax and estate planning depart- ment of Kenlan, Schwiebert, Facey & Goss, P.C., where his practice focuses on a broad range of estate planning, tax, and business matters. Kenlan, Schwiebert, Facey & Goss, P.C. is a mid-size, full service law firm locat- ed in Rutland, Vermont.
____________________ 1
20, 2011. IR-2011-104. 2
$5 million, adjusted for inflation as of October
If the current federal estate tax laws are al- lowed to sunset, marginal estate tax rates on es-
tates greater than $1 million begin at 41%. 3
32 VSA § 7442a. The Vermont estate tax re- turn form and table of rates can be found at
http://www.state.vt.us/tax/formsincome.shtml. 4
Vermont law also provides for an “adjust- ment” to all taxable estates in the form of an automatic $60,000 deduction, which is inherent in the calculation of the pre-2001 federal state death tax credit that the Vermont law incorpo- rates to determine the rate of Vermont’s estate tax. For purposes of this article, all examples used will assume this adjustment has been taken
into account. 5
The recently-enacted Miscellaneous Tax Bill of 2012 amends 32 VSA § 7475 to provide that the federal estate and gift tax laws as in effect on December 31, 2011 are adopted for purposes of calculating the hypothetical federal estate tax li- ability, thereby changing the applicable federal tax rate used for this purpose from 45% to 35%.
Act 0143, Sec. 12. 6
32 VSA § 7475. In cases where no federal es-
tate tax return is required to be filed, a “pro for- ma” federal estate tax return must be prepared and attached to the Vermont estate tax return; otherwise, the actual federal estate tax return is attached, but the hypothetical federal estate tax
calculation is used. 32 VSA § 7445. 7
32 VSA § 7442a(c).
8 9
Internal Revenue Code (I.R.C.) § 2010(c) The recent legislative adoption of federal es-
tate and gift tax laws as in effect on December 31, 2011 “for the purpose of calculating the tax liability under this Chapter” [See 32 VSA § 7475, as amended by Act 0143, Sec. 12] raises the question of whether the hypothetical federal es- tate tax calculation can take into account the un- used exemption of a predeceased spouse, pro- vided the federal estate tax law requirements are otherwise met, including making the appropriate election on a timely filed federal estate tax return for the predeceased spouse. To the knowledge of the authors, the Vermont Department of Taxes
has not yet taken a position on this issue. 10
A note to non-professionals reading this arti- cle: while $2.7 million seems like and is a lot of money, it is very important to recognize that the taxable gross estate of a decedent includes life insurance policy proceeds as well as other tangi- ble and intangible assets. Often, a person can be unaware that they have a potentially taxable es- tate after taking into account life insurance poli- cies and the value of real estate, as well as invest-
ments. 11
“married” treatment to civil union couples). 12
7(b)(2). 13
32 VSA § 7401(a) (which also extends such I.R.C. § 2056(b)(7); Treas. Reg. § 20.2056(b)-
By requiring all income to be paid to the sur- viving spouse not less often than annually, and with no person having the power during the sur- viving spouse’s lifetime to appoint the assets to anyone other than the surviving spouse. I.R.C. §
THE VERMONT BAR JOURNAL • SUMMER 2012
2056(b)(7)(B)(ii). 14
32 VSA 7475.
claratory rulings upon petition. 16
15 3 VSA §808 requires each agency to issue de- § 901, P.L. 107-16 (as amended).
17 This is an approximation. The top Vermont
marginal income tax rate is 8.95%, which would apply to most of the gain in this example. For most categories of property, including personal residences and investments, there is no capital gains exclusion or favorable tax rate in Vermont, although the federal exclusion for gains from the sale of a principal residence also applies for Ver- mont tax purposes. In general, for Vermont pur- poses, a 40% capital gains exclusion applies to gains from sales of certain depreciable proper- ty and from the sale of real estate other than a personal residence. 32 VSA § 5811(21)(B)(ii). This example assumes the entire gain is attributable to the sale of assets that do not qualify for the 40% Vermont capital gains exclusion, and that do qualify for the federal capital gains rate of 15%, resulting in a combined federal/Vermont rate of
roughly 24%. 18
In most cases, all of Molly’s assets, held out- side of the bypass trust, will qualify for the in- come tax basis adjustment to fair market value upon her death; hence, there will be little or no
taxable gain if they are sold shortly thereafter. 19
Under the facts here, if the bypass trust were funded with assets less than $2 million, the sur- viving spouse’s estate would begin to be ex- posed to federal estate tax upon the spouse’s death since it would exceed $5 million. Thus, at certain levels there is a “trade-off” between es- tate tax and income tax benefits. With federal estate tax rates at 35% and capital gains rates at 15%, the situation favors taking steps to mini- mize the estate tax at the expense of losing the basis step-up, but the current volatility in our federal tax laws means that planners need to be
alert to changes that would alter this calculus. 20
In this case, there would also be federal estate tax due since the taxable estate plus prior gifts is
couple’s assets. 21
greater than $5,120,000. 22
$1,076,720. 23
The estate tax on the remaining $7,250,000
estate would be $689,360, whereas the tax on an estate of $10,000,000 would have been
I.R.C. § 2503(b) ($10,000 exclusion, adjusted
for inflation). 24
32 VSA 7442a(c), referencing I.R.C. § 2001. The federal estate tax is imposed on the “tax- able estate” plus “adjusted taxable gifts.” I.R.C. § 2001(b). Therefore, only “taxable gifts” have
the effect of using the federal exemption. 25
I.R.C. § 2503(e). 26 $13,000 x 5 = $65,000; x 3 years = $195,000;.
+ $80,000 = $275,000. 27
32 VSA § 7442a(a) provides: “A tax is hereby imposed on the transfer of the Vermont estate of every decedent … ”
(italics added). The re-
lated definitions of Vermont “gross estate” and “taxable estate” refer to the federal gross and taxable estates of decedents, terms which under federal law do not include prior taxable gifts. 32 VSA § 7402 (13) & (14). See I.R.C. §§ 2001, 2031,
2051. 28
36 MRS § 4102 1.
29 See Burnet v. Guggenheim, 288 U.S. 280 See supra note 13.
(1933). 30
31 32 33 34
32 VSA § 7402 (13). I.R.C. § 2702(a)(3). 32 VSA § 7402 (13). 32 VSA § 1
Gain of $2.2 million; assumes asset appreci- ation is shared proportionally among all of the
31
Planning for the Vermont Estate Tax
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