Vermont is one of just 12 states with state-level estate taxes, and the District of Columbia has its own estate tax. The exclusion is the amount that can be transferred before the estate tax would be applied on the remainder.
The amount of the exclusion is set by the legislature, and after it has been established, there can be adjustments on an annual basis to account for the cost of living.
Since the calendar has turned over, an estate tax exclusion adjustment has been made for 2021. Last year, it was $4.25 million, and it will be $5 million this year. Most states with estate taxes have progressive rates, but we have a 16 percent flat rate here in Vermont.
If you own property in a state outside of Vermont that has its own estate tax, that tax would be factor if its value exceeds the exclusion in that state. It should be noted that the exclusion in Massachusetts is just $1 million.
There is no federal gift tax in Vermont, so generally speaking, you can give gifts while you are living to reduce the value of your estate for tax purposes if necessary. However, large gifts that you give within two years of your passing would count as part of your taxable estate.
State Inheritance Tax
As we have touched upon, an estate tax is levied on the entire taxable portion of an estate before it is transferred to the heirs. An inheritance tax is a different form of taxation. This tax can be levied on transfers to each individual inheritor that is not exempt when an estate is being administered.
There is no federal inheritance tax, and there are only six states and that have state-level inheritance taxes. Fortunately for us, Vermont is not one of them, but if you inherit property that is located in a state with an inheritance tax, it would be applicable.
The states that have inheritance taxes are New Jersey, Pennsylvania, Nebraska, Maryland, Kentucky, and Iowa. For your information, there is a state-level estate tax and an inheritance tax in Maryland.
Federal Estate and Gift Taxes
In addition to the Vermont state estate tax, we also have the federal estate tax in the United States. In 2021, the exclusion is $11.7 million, and the maximum rate is 40 percent.
There is an unlimited marital deduction, so you can transfer unlimited assets to your spouse without incurring any estate tax exposure. The federal estate tax exclusion is portable, so a surviving spouse could use the exclusion that was allotted to their deceased spouse.
We should point out the fact that the Vermont estate tax exclusion is not portable, but there is an unlimited marital deduction. Of course, the surviving spouse would be in possession of a taxable estate, so the utilization of the spousal deduction is not a long-term tax efficiency solution.
You cannot give large gifts to avoid the estate tax, because there is a gift tax that is unified with the federal estate tax. The $11.7 million exclusion is a unified exclusion that applies to lifetime gifts and your estate.
That’s the bad news, but the good news is that there is a separate gift tax exclusion that you can use to give a certain amount to any number of people within a calendar year tax-free. This exclusion is $15,000 per person in 2021.
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