Vermont Estate Under $5 Million: What Taxes Are Still Owed After Death

The most common misunderstanding Vermont executors face: learning the Vermont estate tax exemption is $5 million and concluding that if the estate is under that threshold, there is no tax work to do. That conclusion is wrong, and it causes real problems. A Vermont estate under $5 million owes no Vermont estate tax — but it still owes a final individual income tax return for the decedent, a fiduciary income tax return for the estate if it earns more than $100 in Vermont income after death, and the Form E-2A tax clearance that the probate court requires before it will close the estate and discharge the executor. If the estate includes real property, additional filings apply. Understanding what is actually owed — and what is not — is the starting point for managing the timeline competently.

What Vermont Estates Under $5 Million Do NOT Owe

Vermont abolished its inheritance tax in 1971. Beneficiaries owe no Vermont tax on what they receive. This is a common source of anxiety that has a definitive answer: if you are inheriting money or property from a Vermont estate, you do not owe Vermont taxes on the inheritance itself.

Vermont's estate tax (Form EST-191) applies only to estates where the gross value of all assets — plus taxable gifts made within two years of death — exceeds $5 million. If the estate is under that threshold, no EST-191 is filed, no Vermont estate tax is owed, and the 16% flat rate never applies.

The federal estate tax exemption is $15 million per individual in 2026 — even higher. Most Vermont estates are well below both thresholds.

What Vermont Estates Under $5 Million Still Owe

1. The Final Individual Income Tax Return (Form IN-111)

Every Vermont estate must file a final Form IN-111 for the decedent. This covers all income earned from January 1 of the year of death through the exact date of death — wages, pension distributions, Social Security income, investment income, rental income.

Deadline: April 15 of the year following the death, same as a standard individual return.

Who files it: The executor, signing as fiduciary on behalf of the decedent.

Common traps:

• The return must be marked as a final return with the date of death entered — failing to do this delays processing
• If the deceased is owed a Vermont tax refund, you must attach federal Form 1310 (Statement of a Person Claiming Refund Due a Deceased Taxpayer) to establish legal authority to claim the refund on the estate's behalf
• Income earned after the date of death — interest paid the day after death, a final paycheck mailed a week later — does not belong on this return; it belongs to the estate

2. The Fiduciary Income Tax Return (Form FIT-161)

The estate becomes a separate Vermont taxpayer the moment the decedent dies. Any income generated by the estate's assets during the administration period — interest from a savings account, dividends from a brokerage account, rental income from the house while it is being sold — belongs to the estate, not the decedent.

Vermont requires Form FIT-161 if the estate:

• Earns more than $100 in Vermont income, OR
• Receives $1,000 or more in gross income from Vermont sources, OR
• Is required by the IRS to file a federal Form 1041

The $100 threshold is Vermont-specific and far lower than the federal equivalent. The IRS requires federal Form 1041 when gross estate income exceeds $600. Vermont's threshold is $100. A Vermont savings account earning $9 per month in interest crosses the Vermont threshold within two months. For practical purposes, almost every Vermont estate with an active bank account during the administration period must file at least one FIT-161.

Vermont fiduciary income tax brackets (2025/2026):

• Up to $3,300: 3.35%
• $3,301–$8,100: 6.60%
• $8,101–$11,900: 7.60%
• Over $11,900: 8.75%

The estate's EIN (federal Employer Identification Number, obtained from the IRS) must be used for this filing — not the decedent's Social Security Number. Obtaining the EIN is one of the first administrative tasks.

One more trap: If the IRS later adjusts the federal Form 1041 for any reason, Vermont requires an amended FIT-161 within 60 days of that adjustment — even if the standard three-year statute of limitations has passed. This can reopen a filing obligation after the estate appears closed.

3. The Form E-2A Tax Clearance

This is not a tax return. It is an application to the Vermont Department of Taxes for formal certification that all state taxes have been assessed and settled. Under 32 V.S.A. Section 7454, the probate court cannot discharge the executor, waive the final accounting, or allow any distribution to beneficiaries until this clearance is issued.

The Department will not issue the E-2A until:

• Form IN-111 is filed and any balance paid
• All FIT-161 filings are complete and all balances paid
• No other Vermont tax obligations remain open

For estates under $5 million, the typical E-2A prerequisite sequence is just the IN-111 and FIT-161. The E-2A application itself is filed after both of those are settled and asks the Department to confirm in writing that the estate has no remaining Vermont tax obligations.

Without this clearance, the estate cannot legally close — regardless of how clearly everyone agrees that all the assets should go to the beneficiaries.

Additional Requirements for Estates With Real Property

If the estate includes Vermont real estate, there are additional obligations whether or not the estate approaches the $5 million threshold:

Property Transfer Tax Return (Form PTT-172)

Every transfer of Vermont real estate — including transfers from an estate to a beneficiary with no money changing hands — requires filing a Vermont Property Transfer Tax Return (Form PTT-172) with the local town clerk where the property is located. The town clerk will not record the deed without a completed PTT-172.

The standard Property Transfer Tax rate is 1.25% plus a 0.22% Clean Water Surcharge on the purchase price. For inherited property transferred to family members without consideration, Exemption 05 may eliminate or reduce the tax — but the PTT-172 must still be filed.

Important: Vermont does not have county recorders. All deed recordings and land record filings go through the local town clerk of the municipality where the property is located. Vermont has 246 separate town clerk offices. Recording fees are typically $15 per page for documents and $15 for the PTT-172.

Nonresident Withholding (Form RW-171) for Sales

If a nonresident — an out-of-state executor or out-of-state beneficiary — sells Vermont real property, Vermont law requires the buyer to withhold 2.5% of the gross sale price and remit it to the Vermont Department of Taxes using Form RW-171. This is not a capital gains tax on the gain — it is a withholding on the total sale price.

On a $380,000 property, this is $9,500 withheld at closing that does not go to the estate until the estate files a Vermont nonresident return or claims an exemption. Because inherited property typically receives a step-up in basis to the date-of-death fair market value, the actual capital gains tax owed on a prompt sale may be near zero — making the gross-price withholding far larger than any actual tax liability.

An exemption election can avoid the withholding, but it must be filed before the closing. Out-of-state executors who do not know about Form RW-171 discover it at the closing table.

Step-Up in Basis

When someone dies, the IRS resets the taxable cost basis of their assets to the fair market value on the date of death. For a house purchased for $85,000 in 1985 that is worth $420,000 at death, the inheriting beneficiary's basis starts at $420,000. If they sell it for $430,000, capital gains apply only to $10,000 — not to $345,000 of accumulated gain.

The step-up in basis does not appear on any Vermont tax return — it is recorded in the appraisal and estate inventory. But it determines what will owe in capital gains when the beneficiary eventually sells inherited assets. Executors managing the distribution of real estate or appreciated investment accounts should confirm the step-up in basis is documented before transferring assets.

Medicaid Estate Recovery: An Unexpected Creditor

For estates where the deceased was 55 or older and received Medicaid-funded long-term care, the Department of Vermont Health Access (DVHA) will file a claim against the probate estate. This is not a tax, but it is a state obligation that affects what is distributable — and it must be resolved before the E-2A clearance can be applied for.

The DVHA claim is limited to assets that pass through the probate estate. Assets in irrevocable trusts or joint tenancy with rights of survivorship generally pass outside probate and are not subject to recovery.

Statutory protections exist — recovery is deferred if a surviving spouse, a disabled child, or a caregiving child who lived in the home for two years before the decedent's institutionalization survives the decedent. Hardship waivers for the family home require filing DVHA Forms 13, 14, and 15. This is one area where Vermont legal counsel is advisable before submitting exemption paperwork, as an improperly filed claim can result in the state pursuing the family home.

The Complete Vermont Tax Sequence for Estates Under $5 Million

Step 1: Obtain federal EIN for the estate from the IRS.

Step 2: File Form IN-111 (final individual return) by April 15 of the year following death.

Step 3: File Form FIT-161 for every period in which estate income exceeds $100. Make estimated quarterly payments using Form FIT-165 if the estate generates ongoing income.

Step 4: If the estate includes real property: file Form PTT-172 with the local town clerk for every deed transfer. Address Form RW-171 withholding issues before any real estate closing with nonresident sellers.

Step 5: Resolve any DVHA Medicaid recovery claim if applicable.

Step 6: Apply for Form E-2A tax clearance after all returns are filed and all balances paid.

Step 7: Submit the E-2A clearance to the probate court with final closing filings. Probate closes; executor is discharged.

Who This Applies To

• The executor of any Vermont estate, regardless of whether it triggers estate tax — the IN-111 and E-2A are universal requirements
• Beneficiaries who were told "there is no estate tax" and are confused about why the estate still isn't closed — the clearance sequence explains the delay
• Out-of-state executors who are unfamiliar with Vermont's filing thresholds and town clerk system
• Surviving spouses who need to understand Vermont's lack of portability — the deceased spouse's unused $5 million exemption cannot be transferred, so if the survivor's own estate is substantial, planning is needed

Who This Is NOT For

• Executors of estates that clearly exceed $5 million and require Form EST-191 estate tax filing with professional appraisals — professional help is appropriate for that
• Contested estates, insolvent estates, or adversarial Medicaid recovery proceedings — those require Vermont legal counsel beyond what a guide provides

The Vermont Final Tax & Estate Tax Guide is built specifically for the complete post-death tax sequence — from the final individual return through the E-2A clearance — including the Vermont-specific fiduciary filing threshold, the real estate withholding rules, the town clerk system, and standalone printable tools for every stage of the clearance sequence.

Get the Vermont Final Tax & Estate Tax Guide

Frequently Asked Questions

If Vermont's estate tax threshold is $5 million, why does my estate still have tax work to do?

The $5 million threshold applies only to the Vermont estate tax (Form EST-191). That tax applies to wealth transferred at death and is levied on the estate before beneficiaries receive anything. Separately, Vermont requires the decedent's final individual income tax return (Form IN-111) for income earned before death, and a fiduciary income tax return (Form FIT-161) for income the estate generates after death. Both of these apply to estates of any size. The Form E-2A tax clearance — required to close probate — is also universal.

Does Vermont have an inheritance tax for beneficiaries?

No. Vermont eliminated its inheritance tax in 1971. Beneficiaries do not owe Vermont tax on money or property they receive from a Vermont estate. What they may owe later: capital gains if they sell inherited assets for more than the stepped-up basis, and Vermont income tax on any ongoing income from those assets (rental income from inherited property, dividends from inherited stock). But the inheritance receipt itself is not taxed in Vermont.

How long does the Vermont probate process take for an estate under $5 million?

Vermont probate timelines are primarily driven by the creditor notification period (four months from the date of publication of the notice to creditors), the tax filing sequence, and the E-2A clearance processing time. Most uncontested Vermont estates close in nine to eighteen months. The timeline lengthens when the FIT-161 filings span multiple fiscal years (if the estate generates ongoing income), when real estate sales are delayed, or when the E-2A application is delayed due to incomplete prior filings.

Do I need a CPA to file the Vermont fiduciary return (Form FIT-161) for a small estate?

Not necessarily. The FIT-161 is a Vermont fiduciary income tax return that follows a standard format — income, deductions, credits, tax calculation using Vermont's fiduciary brackets. For an estate with simple income (bank interest, a few dividend payments), most organized executors can file it with clear instructions covering Vermont's specific form fields and thresholds. A CPA is appropriate if the estate income includes capital gains from business assets, rental property depreciation, or complex investment distributions requiring Schedule FIT-162 adjustments.

What is the Vermont estate tax rate if the estate does exceed $5 million?

Vermont taxes the amount above $5 million at a flat 16% rate. There are no graduated brackets — the rate is 16% on the excess, period. Unlike the federal estate tax system, which uses progressive brackets up to 40%, Vermont's structure is simpler but applies at a lower threshold. On an estate of $6 million, $1 million is taxable at 16%, resulting in $160,000 in Vermont estate tax. Vermont also does not index the $5 million threshold for inflation, and the exemption has remained at $5 million since 2021.

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