Vermont Estate Tax

Even if the estate you’re handling isn’t large enough to owe federal estate tax, it might need to pay a separate Vermont estate tax.  For deaths in 2011, estates with a total value of more than $2.75 million are subject to the state estate tax. Of the 5,000 new estates in Vermont each year, about 30 are subject to the tax, according to the Vermont Blue Ribbon Tax Structure Commission.

Which Estates Must File

If the gross estate of a Vermont resident has a value of more than $2.75 million, the executor must file a state estate tax return. (Federal estate tax returns are currently required only for estates worth more than $5 million.)  

It’s not just state residents who may owe Vermont estate tax. The estate of a nonresident may also need to file a Vermont estate tax return, if the person owned valuable real estate in Vermont or kept other tangible assets in the state.

Adding Up the Gross Estate

To determine whether or not a Vermont estate tax return is required, add up the value of the deceased person’s gross estate. Be sure to include:

• Real estate in Vermont
• Bank accounts, certificates of deposit, and investment accounts, including those for which a payable-on-death beneficiary was named
• Vehicles and other personal property kept in the state
• Proceeds from life insurance policies on the deceased person’s life, unless that person didn’t own the policy
• Retirement account funds
• Business interests (sole proprietorship, limited liability company, or small corporation)

If any assets were owned with someone else, count only the value of the deceased person’s interest. For example, if the deceased person owned a house with her husband, include half of its value. If, however, property was owned in joint tenancy with someone else, then include the total value except for funds that the other person contributed.

Also include these assets:

• Taxable gifts made during life. If the deceased person made taxable gifts (more than the annual exclusion amount, which is currently $13,000 per year per recipient), then add the taxable amount of those gifts to the value of the estate.
• Some transfers made fewer than three years before death. If the deceased person transferred a life insurance policy to an irrevocable life insurance trust within three years of death, you must include the value of the policy in the estate.
• Assets held in a trust. The value of assets the deceased person held in a revocable living trust or other trusts the deceased person controlled is included in the taxable estate.

Vermont Estate Tax Rates

The maximum Vermont estate tax rate is 16%, far below the federal rate. The maximum rate affects only estates that are close to $13 million in total value.

No ‘Portability’ Provision for Vermont Couples

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 entire $5 million federal estate tax exemption, then the second spouse’s estate can use the unused portion of the first spouse’s exemption amount. This is called the “portability” provision, and it’s set to expire at the end of 2012, but Congress may choose to extend it. 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.

Property Left to a Surviving Spouse

Property left to a surviving spouse is exempt from state estate tax, no matter what the amount.

Filing the Tax Return

The executor must file the Vermont estate tax return (Form E-1) and pay any tax due nine months after the date of death. You can apply for a six-month extension for filing, but that doesn’t extend the time to pay.

If you’re also filing a federal estate tax return (IRS Form 706), you must enclose a copy of the first page when you file the Vermont return. If no federal return is required, you must complete an entire “dummy” return, complete with all attachments, and submit it with the Vermont return.

You can download the Vermont estate tax return form and instructions at the website of the state department of taxes.

Expert Help With Estate Tax Returns

Preparing a federal or Vermont estate tax return is a big undertaking that really requires the help of an expert. Both state and federal returns are long and complicated. Hire a lawyer or CPA who has lots of recent experience with Vermont estate tax returns and procedures; the fee will probably be several thousand dollars, but it will be worth it.