If you make your home in Vermont (or own valuable property, such as a vacation home, in the state), then after your death, your estate may owe Vermont estate tax. For deaths in 2012 or 2013, estates with a total value of more than $2.75 million are subject to the state estate tax; the exempt amount may be different in the year of your death. Only about 30 estates a year now pay Vermont estate tax, according to the Vermont Blue Ribbon Tax Structure Commission.
The Vermont estate tax is completely separate from the federal estate tax. For deaths in 2013, the federal tax applies only to some estates that are valued at more than $5.25 million, which means that only the richest families pay this tax.
The Vermont Filing Requirement
If your gross estate (which includes all assets you own at your death) has a value of more than $2.75 million, the executor must file a state estate tax return. The estate may not owe tax, however. For example, all property you leave to your spouse passes tax-free, no matter how large the value.
If you’re a nonresident but own Vermont real estate (or other valuable assets physically located in Vermont), your estate may need to file a Vermont estate tax return if your Vermont assets are valued at more than the exempt amount.
Your Gross Estate
To determine whether or not a Vermont estate tax return is required, your executor will add up the value of your:
- Real estate
- Bank accounts (savings, checking, certificates of deposit)
- Retirement and non-retirement investment accounts
- Personal property (that’s everything except real estate)
- Business interests (sole proprietorship, limited liability company, or small corporation)
- Proceeds from life insurance policies on your life, unless you transfer ownership of the policy to someone else (or an irrevocable trust) more than three years before your death
If you make large taxable gifts (more than the annual federal gift tax exclusion amount, which is currently $14,000 per year per recipient), the taxable amount of those gifts will also be counted as part of your estate for tax purposes. It doesn’t matter, by the way, whether or not you hold assets in a revocable living trust. For estate tax purposes, these kinds of trust assets are treated just like assets you own in your own name.
No ‘Portability’ for Vermont Estate Tax Exemptions
Federal law currently allows spouses to share their individual federal estate tax exemptions. If the first spouse to die doesn’t use up all of his or her federal estate tax exemption, then at the second spouse’s death, his or her estate can use the unused portion. This is called the “portability” provision. Like other federal tax breaks, this one does not apply to legally married same-sex couples.
Spouses cannot share their individual estate tax exemptions for Vermont estate tax purposes.
The Vermont Estate Tax Return
If the value of your gross estate exceeds the state exemption amount, your executor will need to file a Vermont estate tax return and pay any tax due nine months after the date of death. The state will grant a six-month extension for filing, but it doesn’t extend the time to pay the tax. The maximum Vermont estate tax rate is 16%, far below the federal estate tax rate.
If a state return is required, a federal one must be filed with the state as well. If no federal return is required, a “dummy” return must be prepared. Vermont estate tax returns and instructions can be downloaded from the state department of taxes website. But your executor will need to hire an expert (a lawyer or CPA) to prepare the tax return; it’s much more complicated than an income tax return. The expert’s fee can be paid from estate assets.