Like many people, you may consider avoiding federal and/or state gift and estate taxes an important estate planning objective. After all, failing to incorporate tax avoidance strategies into your estate plan could cost your estate (and your beneficiaries) a substantial amount of money. With that in mind, an Essex Junction attorney at Unsworth LaPlante, PLLC explains why you should be taking advantage of the annual exclusion in your Vermont estate plan.
Understanding Federal Gift and Estate Taxes
The federal gift and estate tax is essentially a tax on the transfer of wealth. Both transfers made during a taxpayerâs lifetime in the form of a gift and transfers made at the time of death in the form of an inheritance are subject to the tax. Historically, the estate tax rate fluctuated on a yearly basis; however, with the passage of the American Taxpayer Relief Act of 2012 (ATRA) the tax rate was permanently set at 40 percent. That means that absent any deductions or adjustments to your estateâs value, you could lose 40 percent of that value to federal gift and estate taxes.
Calculating the Federal Gift and Estate Tax
The federal gift and estate tax is levied on the combined value of all qualifying gifts made during your lifetime and the value of all estate assets owned at the time of your death. For example, imagine that you made gifts to children and other loved ones during your life worth a combined total of $5 million. At the time of your death, you owned assets with a total value of $15 million. The combined total of $20 million would potentially be subject to federal gift and estate taxes. Without any further adjustments, your estate would lose a staggering $7.4 million to federal gift and estate taxes!
The Lifetime Exemption
Each taxpayer is entitled to make use of the lifetime exemption to reduce the amount of gift and estate taxes owed by their estate. ATRA set the lifetime exemption amount at $5 million, to be adjusted for inflation each year. Legislation enacted in 2017, however, changed the lifetime exemption amount for 2018 and for several years thereafter. Under that law, the exemption amounts increased to $13.99 million for individuals and $27.98 million for married couples for 2025. The exemption amounts were scheduled to revert to 2017 levels on January 1, 2026; however, the âOne Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, making even more changes to the transfer tax system. The most important update was the permanent extension and expansion of the lifetime exemption. Beginning in 2026, the exemption will permanently increase to $15 million per person, with inflation adjustments tied to 2025 as the new baseline.
The Annual Exclusion
Using the lifetime exemption significantly reduces your estateâs exposure to federal gift and estate taxes; however, there are additional tax avoidance strategies that can reduce your tax debt even more if incorporated into your estate plan far enough ahead of time. For instance, the annual exclusion can help you transfer a sizable portion of your wealth tax-free. Using the exclusion, an individual can make yearly gifts valued at up to $19,000 (for 2025) to an unlimited number of beneficiaries without those gifts counting toward their lifetime exemption limit. A married couple can double the amount, meaning they can give up to $38,000 per beneficiary each year. Assuming you are married in the above example and have four children. If you and your spouse made the maximum gifts to your four children each year for 10 years, you could transfer $152,000 a year (starting in 2025) tax-free for a total tax-free wealth transfer of $1.52 million at the end of the 10-year period. You could save your estate over $600,000 in taxes, meaning you have more money available to pass down to loved ones.
Are You Interested in Incorporating the Annual Exclusion into Your Vermont Estate Plan?
For more information, please attend one of our upcoming FREE webinars. If you have questions or concerns about incorporating the annual exclusion into your Vermont estate plan, contact an experienced Essex Junction estate planning attorney at Unsworth LaPlante, PLLC by calling 802-879-7133 to schedule your appointment today.
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