Expert tells Ways & Means committee trusts can be used to sidestep Vermont income and estate taxes; committee urged to study fix
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Summary
Professor Brian Galli told the House Ways and Means Committee that a drafting gap in Vermont’s resident‑trust rules could let wealthy residents shift income and capital gains to out‑of‑state trusts and avoid Vermont income and estate taxes; he recommended a narrow statutory change and suggested the Department of Taxes study the scale of any loss.
Professor Brian Galli, a law professor at the University of California, Berkeley, told the House Ways and Means Committee on April 14 that trusts can be structured so wealthy Vermont residents avoid paying state income and estate taxes.
"It would be possible for wealthy individuals in Vermont to pay essentially no income tax and essentially no estate tax," Galli said, summarizing the planning techniques he described to lawmakers. He explained that because a trust is a separate taxpayer and can be governed by laws of another state, taxpayers can route income and appreciated assets into trusts governed by zero‑income‑tax jurisdictions while still living in Vermont.
Galli told committee members the primary concern for the state budget is an income‑tax strategy that moves income streams out of Vermont to jurisdictions with no income tax. He described a specific loophole in Vermont law: if a Vermonter funds a first‑tier trust that is treated as a Vermont resident and that trust then transfers assets into a second, out‑of‑state trust, the second trust may not be defined as a Vermont resident. "You can use straw intermediaries to get money into like a second tier or third tier trust, and it won't count as a Vermont resident," he said.
Committee members asked whether states gain economic benefit from hosting trust business; Galli said states such as South Dakota and Delaware have tweaked laws to attract trust administration jobs, but such industries typically create only a handful of positions relative to the tax advantages they offer. He added that common, non‑abusive uses of trusts—asset protection, planning for family members with disabilities, and probate avoidance—also justify some trust rules.
On the estate tax, Galli said Vermont currently has a 16% estate tax with a $5,000,000 exemption and that trusts can often remove assets from an individual's taxable estate if the funder relinquishes sufficient control. He said federal tools such as the generation‑skipping transfer tax (GST) can limit some avoidance and noted some states have adopted measures (he cited New York) to treat transfers into trusts as taxable in certain circumstances.
Galli recommended a narrow legislative fix: redraft Vermont’s definition of a "resident trust" to close the multi‑tiered‑trust loophole. He offered to provide committee staff with proposed statutory language and urged lawmakers to ask the Department of Taxes to investigate how widespread the practice is and how much revenue might be at risk. "Fixing the problem is pretty low cost, and you might as well," he said.
Committee members also raised administrative concerns: how the state would identify and audit remote trusts, whether foreign trustees would recognize Vermont obligations, and whether professionals in Vermont use the techniques Galli described. Galli suggested taking testimony from Vermont professional trustees and noted information‑sharing agreements and IRS reporting have improved access to records since 2010.
The committee did not vote on any proposal during the hearing. Galli said he would share suggested statutory language with staff; the committee recessed for a 15‑minute break and announced its next guest would be from the state fire system.
Sources: Committee hearing at House Ways and Means, April 14, 2026; testimony and answers by Professor Brian Galli (University of California, Berkeley).
