Vermont Estate Planning 2026: The $5M Exemption, Flat 16% Rate, and What Burlington and Stowe Families Must Know

Vermont is one of only a dozen states that still levies an estate tax — and the math is straightforward and steep: a flat 16% on everything above $5,000,000, with no portability between spouses and a unique two-year lookback on gifts made shortly before death. A Burlington couple with a combined $10M estate who passes everything to the surviving spouse will leave their heirs a $800,000 Vermont estate tax bill that a bypass trust eliminates entirely. Vermont's $5M exemption has not moved since 2021 and is not inflation-indexed — meaning its real value erodes every year as estates grow. And non-residents who own ski homes in Stowe, Killington, or Stratton face Vermont estate tax on that property even if they live in Massachusetts, New York, or Connecticut. This guide explains Vermont's estate tax mechanics, the no-portability trap, the 2-year gift add-back rule that most articles miss, and the planning strategies that eliminate or reduce Vermont's exposure for HNW families.

How Vermont estate tax works in 2026

Vermont's estate tax statute — 32 V.S.A. § 7442a — imposes a tax on the Vermont taxable estate of any decedent who was a Vermont resident at death, or who owned Vermont situs property (real estate, tangible personal property located in Vermont) at death.¹

The Vermont taxable estate is computed as:¹

1. Start with the federal taxable estate (gross estate minus allowable deductions — marital deduction, charitable deduction, debts, expenses). Vermont follows the federal taxable estate as the starting point, whether or not a federal return is required.
2. Add back state and local death taxes deducted on the federal return (if any).
3. Add back federal adjusted taxable gifts made within two years of death. This is Vermont's most distinctive feature: large gifts made close to death — including trust fundings — are pulled back into the Vermont taxable estate.
4. Subtract the $5,000,000 exemption.
5. Apply the 16% flat rate to the remaining taxable amount.

Unlike most state estate taxes — which use a graduated rate schedule inherited from the pre-2001 federal estate tax — Vermont uses a clean flat rate. Every dollar transferred out of a Vermont estate saves exactly $0.16 in Vermont estate tax. A SLAT funded with $3M saves $480,000. An ILIT that removes a $2M policy from the estate saves $320,000.

Vermont estate tax = (gross estate minus deductions minus $5,000,000) × 16%. Source: 32 V.S.A. § 7442a. Assumes no charitable or marital deduction. Single filer or second-to-die analysis.

The no-portability trap — why married couples need a bypass trust

Vermont does not offer portability. At the first spouse's death, that spouse's $5,000,000 Vermont estate tax exemption either gets used or it disappears permanently. There is no Form EST-191 election to preserve the first spouse's unused exemption — unlike the federal portability election (Form 706), which does exist at the federal level but has no Vermont counterpart.²

The bypass trust solution

A bypass trust (also called a credit shelter trust) is the foundational Vermont estate planning tool for married couples. At the first spouse's death, assets equal to the $5,000,000 exemption are funded into the bypass trust rather than passing outright to the surviving spouse. The surviving spouse can receive trust income and discretionary principal during life (within an ascertainable standard such as HEMS — health, education, maintenance, and support). At the survivor's death, the bypass trust assets pass to heirs estate-tax free — the assets were locked out of the survivor's taxable estate at the first death.

$10M combined estate. First spouse funds $5M bypass trust; $5M passes to surviving spouse. At survivor's death, $5M taxable estate minus $5M exemption = $0 VT estate tax. Without bypass: survivor's $10M estate minus single $5M exemption = $5M taxable at 16% = $800,000. Source: 32 V.S.A. § 7442a.

At a $14M combined estate, the bypass trust saves $1,440,000. The trust drafting cost is a one-time $5,000–$10,000 — a return on investment that is difficult to match anywhere else in financial planning.

Asset equalization: the prerequisite step

The bypass trust only works if each spouse has sufficient assets in their own name to fund the trust. Vermont families frequently hold all assets jointly or in one spouse's name — often because of how real estate, retirement accounts, and brokerage accounts were accumulated. If the first spouse to die has no individually held assets, there is nothing to fund the bypass trust, and the exemption is wasted even if the trust document exists. Asset equalization — retitling assets between spouses before death — is an essential and often overlooked first step.

Vermont's 2-year gift add-back: the rule most articles miss

Vermont's estate tax statute contains a provision that most guides overlook: federal adjusted taxable gifts made within two years of death are added back to the Vermont taxable estate for purposes of computing Vermont estate tax.¹ This means that if you fund a SLAT, make a large outright gift, or transfer significant assets to an irrevocable trust within 24 months of death, those transfers return to your Vermont taxable estate as if you had never made them.

What the 2-year add-back means for planning

• Start trust strategies early. A SLAT or IDGT funded 10 years before death permanently escapes the Vermont estate. A SLAT funded the year before death is pulled back in — defeating the strategy.
• Annual exclusion gifts ($19,000/year per recipient) are not affected. Annual exclusion gifts do not create "adjusted taxable gifts" because they do not reduce the federal lifetime exemption. They escape the VT add-back regardless of timing.
• Direct tuition and medical payments (IRC §2503(e)) are similarly unaffected. These payments to educational institutions and medical providers are excluded from the definition of taxable gifts entirely.
• The 2-year window is survivorship-dependent. The add-back applies only if death occurs within 2 years of the gift. A gift made 2 years and 1 day before death is permanently outside the Vermont estate.

The practical implication: Vermont favors early, sustained planning over last-minute large transfers. If you are a Vermont resident with a $10M+ estate, the time to fund SLATs, GRATs, IDGTs, and dynasty trusts is now — not two years before you think you might need to.

No Vermont gift tax: the annual gifting advantage

Vermont has no state gift tax. Unlike Connecticut — the only state that still levies a gift tax — gifts made by Vermont residents are not subject to VT gift tax and (beyond the 2-year lookback window) do not return to the Vermont taxable estate at death. There is no VT gift tax tracking, no separate VT lifetime exemption to exhaust, and no VT gift tax return to file.⁴

Annual exclusion gifting

• $19,000 per recipient per year (2026 federal annual exclusion).³ No federal gift tax return required. Not counted against the federal lifetime exemption ($15M per person, OBBBA permanent).
• $38,000 per recipient with gift splitting (IRC §2513 — married couples treat each gift as made equally by both spouses on Form 709).
• Unlimited recipients. A couple with three adult children and four grandchildren can give $38,000 × 7 = $266,000/year, permanently outside the Vermont estate with no VT gift tax and no VT lookback (because these gifts are not adjusted taxable gifts).
• Compound math: $266,000/year for 10 years = $2.66M removed from the Vermont estate — plus all appreciation on those gifted assets accumulates outside the estate.

529 superfunding

Front-loading five years' worth of annual exclusion gifts into a 529 account: $95,000 per beneficiary ($190,000 with gift splitting) in 2026. No VT gift tax. A couple with four grandchildren can superfund $760,000 into 529s in a single year — permanently outside the Vermont estate, permanently building tax-free education savings that can roll to a Roth IRA if unused (SECURE 2.0 §126, $35,000 lifetime, 15-year account history required).

Direct tuition and medical payments (IRC §2503(e))

Payments made directly to educational institutions for tuition, or directly to medical providers for medical expenses, are excluded from gift tax entirely — no dollar limit, no return required, no reduction in annual exclusion or lifetime exemption, and not included in the Vermont 2-year add-back. A Vermont grandparent paying $80,000/year directly to a university removes $800,000 from their estate over 10 years at zero VT or federal gift tax cost.

Non-resident property: the Vermont ski home trap

Vermont estate tax applies to Vermont situs property owned by non-residents at death. If you live in Massachusetts, New York, New Jersey, or Connecticut but own a ski house in Stowe, Killington, Stratton, or Okemo, that property is subject to Vermont estate tax when you die — in addition to any estate tax imposed by your state of domicile.²

How non-resident Vermont estate tax is computed

Vermont applies the full estate tax computation to the non-resident's Vermont situs property, then uses an apportionment ratio (VT situs property ÷ total gross estate) to determine the Vermont estate tax due. The flat 16% rate and $5M exemption still apply, but the exemption is also apportioned.

Example: A Massachusetts resident dies with a $9M gross estate including a Stowe ski chalet now worth $1.8M (purchased for $600K). Vermont estate tax computation (simplified):

• VT situs property: $1,800,000
• Apportionment ratio: $1,800,000 ÷ $9,000,000 = 20%
• Vermont applies $1M of the $5M exemption to the VT situs portion (20% of $5M)
• VT taxable: $1,800,000 − $1,000,000 = $800,000 × 16% = $128,000 VT estate tax

The Massachusetts resident owes Vermont estate tax on the ski property on top of whatever Massachusetts estate tax applies to the full estate. Holding the ski chalet through a Vermont LLC converts Vermont situs real property to an LLC membership interest — an intangible personal property interest that is generally not Vermont situs for a non-resident, potentially eliminating Vermont estate tax on that asset. This strategy requires careful structuring and legal advice regarding IRC §2036 and valuation discounts.

Trust strategies for $5M+ Vermont families

Annual gifting alone removes approximately $200,000–$300,000/year from the estate of a Vermont couple with three children and a few grandchildren. For families with estates of $10M, $15M, or $20M, irrevocable trust strategies can accelerate wealth transfer significantly.

Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust funded by one spouse with assets for the benefit of the other spouse and their children. The funded assets are permanently removed from the grantor spouse's Vermont estate. The beneficiary spouse retains access to trust income and discretionary principal during life (indirect access). Vermont's flat 16% rate means a $3M SLAT saves $480,000 in Vermont estate tax permanently — plus all future appreciation on those $3M compounds outside both spouses' taxable estates. No Vermont gift tax makes the SLAT especially efficient: the same strategy in Connecticut triggers the CT gift tax against the unified CT lifetime exemption. Learn more about SLATs →

Grantor Retained Annuity Trust (GRAT)

A zeroed-out GRAT transfers future appreciation above the IRS §7520 hurdle rate to heirs with minimal gift tax cost (often $0 in taxable gift). Any asset growth above the §7520 rate passes to the remainder beneficiaries free of both Vermont estate tax and federal estate tax. GRATs are ideal for volatile assets expected to outperform the hurdle rate — pre-IPO equity, appreciated real estate, business interests. Because Vermont has no gift tax, there is no VT-level tracking of the GRAT remainder value. Caution: fund GRATs well before the 2-year add-back window closes — if the grantor dies during the GRAT term, the full trust value is pulled back into the Vermont estate under IRC §2036. GRAT calculator →

Intentionally Defective Grantor Trust (IDGT) installment sale

An IDGT installment sale allows you to sell appreciated assets (business interests, real estate, investment portfolios) to the trust in exchange for a promissory note at the applicable federal rate (AFR — the minimum IRS-approved interest rate). The sale is income-tax-free because it's a grantor-trust transaction (Rev. Rul. 85-13). The full asset value is removed from the Vermont estate. Any growth above the AFR accumulates in the trust for heirs. The note's interest payments flow back to the grantor — offsetting some income. For Vermont residents with a $5M closely-held business, an IDGT installment sale can move $5M out of the Vermont estate, saving $800,000 in Vermont estate tax (and estate appreciation compounds outside the estate permanently). IDGT guide and calculator →

Irrevocable Life Insurance Trust (ILIT)

Life insurance proceeds are included in the Vermont estate under IRC §2042 if the insured held incidents of ownership. An ILIT holds the policy outside the insured's estate: proceeds are paid to the trust, not to the estate, and are excluded from the Vermont taxable estate. For a Vermont family with a $2M term policy, an ILIT saves $320,000 in Vermont estate tax permanently. Annual Crummey notices ($19,000 per beneficiary) allow the insured to fund premium payments via annual exclusion gifts — no Vermont gift tax, no Vermont add-back (annual exclusion gifts are not adjusted taxable gifts). ILIT guide →

Dynasty trust in a favorable state

Vermont enforces the traditional Rule Against Perpetuities, limiting most trusts to approximately 90 years. Vermont is not a dynasty trust state. However, Vermont families can establish dynasty trusts in states that have abolished the RAP entirely — South Dakota, Nevada, Delaware, Wyoming, Alaska — and fund those trusts with Vermont assets. A properly structured SD or NV dynasty trust, funded with $5M by a Vermont resident more than 2 years before death, permanently escapes Vermont estate tax and eliminates GST tax at every subsequent generation (up to the $15M GST exemption). Dynasty trust guide →

Burlington case study: the Morrison family

Situation: David (64) and Karen (61) Morrison live in Burlington's Hill Section. Their estate: Burlington home $1.1M, Stowe ski house $950,000, investment portfolio $4.2M, retirement accounts (IRAs + 401k) $2.8M, whole life insurance $1.1M. Total gross estate: $10.15M.

Without planning: At David's death, everything passes to Karen via the marital deduction — $0 Vermont estate tax at the first death. David's $5M Vermont exemption is permanently wasted. At Karen's death with a $10.15M estate (plus growth to ~$12M after a decade): Vermont estate tax = ($12M − $5M) × 16% = $1,120,000. Federal estate tax = $0 (below $15M federal threshold). $1,120,000 Vermont estate tax reduces what Karen's children inherit.

With bypass trust, ILIT, and annual gifting:

• At David's death: $5M funded into bypass trust (Stowe ski house $950K + investment portfolio $4.05M). Remaining $5.15M — including IRAs (can't retitle) + life insurance + home + remaining portfolio — to Karen. Vermont estate tax at first death: $0 (marital deduction on the outright portion; bypass trust uses David's exemption).
• ILIT established years ago holds the $1.1M whole life policy outside both estates. Crummey notices funded from annual exclusion — no Vermont gift tax, no Vermont add-back.
• Annual gifting to three adult children: $38,000/year × 3 = $114,000/year removed from Karen's estate permanently. Over 10 years: $1.14M removed.
• At Karen's death (10 years later, estate grown to ~$11M on the non-bypass portion, minus $1.14M in gifts): ~$9.86M estate minus IRA balances that pass via beneficiary designation outside the taxable estate, minus bypass trust ($5M not in Karen's estate). Taxable portion: perhaps $4.5M — below the $5M threshold. Vermont estate tax: $0.
• Total Vermont estate tax across both deaths: $0 vs. $1,120,000 without planning. Over $1M in savings.

Vermont vs. New Hampshire vs. Massachusetts: a comparison

Vermont residents who maintain a second home in New Hampshire — or who retire to NH — should be aware that establishing NH domicile eliminates Vermont estate tax on personal property and non-Vermont real estate. Domicile requires genuine relocation: consistent state of return, driver's license, voter registration, professional registrations, and day count documentation. Continuing to own Vermont real estate after establishing NH domicile means Vermont estate tax still applies to the VT property — only on an apportioned basis, not on the full estate.

Seven costly Vermont estate planning mistakes

1. Leaving everything outright to the surviving spouse. The unlimited marital deduction eliminates Vermont estate tax at the first death — but permanently wastes the first spouse's $5M Vermont exemption. At the second death, the survivor has only one $5M exemption against the combined estate. On a $12M estate, that costs $1,120,000 in avoidable Vermont estate tax. A bypass trust uses both exemptions for $0 Vermont estate tax at the second death.
2. Failing to equalize assets between spouses. The bypass trust only works if the first spouse to die has assets in their own name equal to the $5M exemption. Common problem: all assets are held jointly or in one spouse's name. The trust document exists but can't be funded. Equalizing asset titling — moving brokerage assets, business interests, or real estate into separate name ownership — must happen before death.
3. Ignoring the 2-year gift add-back rule. Vermont's add-back of gifts made within 2 years of death is unique and frequently overlooked. Making a large SLAT or IDGT funding close to death pulls those assets back into the Vermont estate. The solution: start large gifting and trust strategies early in your planning horizon, not when health declines.
4. Assuming OBBBA eliminated the Vermont estate tax problem. The One Big Beautiful Bill Act (July 2025) permanently raised the federal estate tax exemption to $15M — but had zero effect on Vermont's $5M exemption. Families who believe they've resolved their estate tax exposure because of OBBBA may still face six-figure Vermont estate tax bills. Vermont is entirely independent of the federal amount.
5. Not planning for the Stowe or Killington ski house (non-residents). Massachusetts, New York, New Jersey, and Connecticut residents who own Vermont ski property forget that Vermont will tax that property at death. Holding the ski chalet through a Vermont LLC converts Vermont situs real estate to intangible personal property — generally not Vermont situs for a non-resident — and can eliminate Vermont estate tax on that asset.
6. Naming the estate as IRA beneficiary. IRAs pass outside the estate via beneficiary designation if a living beneficiary is named. Naming the estate pulls the IRA into the Vermont taxable estate, subjecting it to Vermont estate tax (16% on amounts above $5M) before it is ever distributed. Name individual beneficiaries or a qualified see-through trust. IRAs also generate income in respect of a decedent (IRD) — heirs pay ordinary income tax on every dollar withdrawn — so minimizing the Vermont estate tax on top of IRD is especially important.
7. Outdated formula clauses after OBBBA. Many Vermont estate plans drafted before 2025 used formula clauses to fund the bypass trust with the "applicable exclusion amount" — whatever the federal lifetime exemption was at death. After OBBBA set the federal exemption at $15M, these formula clauses now direct $15M into the bypass trust — likely the entire estate — disinheriting the surviving spouse and triggering unintended consequences. Vermont estate plans drafted before 2025 should be reviewed immediately for formula clause problems.

Working with a fee-only advisor on Vermont estate planning

Vermont estate tax planning requires three disciplines working in coordination: a financial advisor to model estate growth and strategy economics, a trust-and-estates attorney to draft the bypass trust, SLAT, ILIT, and related documents, and a CPA to handle Form 709 gift tax returns and Form EST-191 at death.

Fee-only advisors — those who charge a flat fee or percentage of assets and earn no sales commissions — have no incentive to recommend strategies that generate higher commissions. For Vermont families where the math is straightforward (bypass trust saves $160,000 to $1.6M+ against a $7,000–$12,000 drafting cost), the case for acting is clear and objective. Fee-only advisors model the tradeoffs — bypass trust vs. portability-reliance, SLAT timing vs. 2-year add-back risk, ILIT vs. self-insuring — without an interest in which product you buy.