Vermont Legislature SmartTranscripts:

[Rep. William Canfield]: Good afternoon. This is House Ways and Means. It's 04/14/2026, and here we are. And Brian, if you could help me with your last name and introduce yourself.

[Brian Galle]: Thank you. Good morning. I'm Brian Galley, I'm a professor of law at the University of College Berkeley, University of California, Berkeley. Still getting practice saying that. I'm pretty new here.

[Rep. William Canfield]: Okay, with the absence of chair Cohen, heiser, we can get started. And do have a presentation, or would you like to take questions?

[Brian Galle]: I'm happy to proceed however the committee wants to proceed, but I have prepared some remarks, and I am happy to take questions at any point in the remarks if I say anything that doesn't make sense to anybody. But I want to make sure my remarks are the most useful to you. So maybe give me some direction. I'll tell you what I'm initially planning to say and tell me if that's what you want hear about.

[Rep. William Canfield]: I believe we're going to have a discussion on trusts.

[Brian Galle]: That's my understanding and so my plan was to talk for a little bit about what's a trust and what's it ordinarily used for and then talk about the ways in which trusts are used by tax planners today and could be used in particular in Vermont to create two significant tax loopholes that would make it possible essentially for wealthy individuals in Vermont. There aren't as many in your state as in mine, but still some would be possible for wealthy individuals in Vermont to pay essentially no income tax and essentially no estate tax. And I assume both of those are undesirable outcomes for you.

[Rep. Woodman Page]: Yeah.

[Brian Galle]: Right, so if that's Go

[Rep. William Canfield]: ahead. Representative Ode has a question.

[Brian Galle]: Please.

[Rep. Carol Ode]: I'd like to know, as it goes through here, will you be telling us which states do allow these things, whether we allow them, so we can get an idea of who has them, who doesn't have them, and then anything you can talk about regarding who lives in those states, the economy of those states.

[Brian Galle]: Thing, I will try to give you a little bit of a comparative sense. I don't have at my fingertips all of the data that you're asking for, on exactly kind of what states with different rules look like.

[Rep. Carol Ode]: Yeah, thanks.

[Brian Galle]: Yeah. So it's just first, what's a trust? You probably know this, but a trust is a business entity that doesn't have owners, right? It's a like other business entities. It could be essentially formed for a corporation, we would say incorporated in any state, which means it would be governed by the laws of that state. But the administration of the trust, the decisions aren't necessarily happening in that state. Trustee, the name of the person who runs the trust trustee can be anywhere. So for example, you could have a Delaware trust, trust that is governed by the laws of Delaware, and then the trustee would be in South Dakota. That's not necessarily common. Often trustees are located in a state and they also want to govern trusts that are governed by the laws of that state so that they're familiar with the rules of the trust they're applying, but doesn't have to be structured that way.

[Rep. Carol Ode]: Must a resident of Vermont make any of their trusts in the state of Vermont or can they create one anywhere they want?

[Brian Galle]: A Vermonter can hire a trustee anywhere in the world to run their trust and that trust can be governed by the laws of any jurisdiction where trusts exist. Besides The United States there are mostly former British Commonwealth countries where trusts exist but also some places that you or I would probably call tax havens have trusts.

[Rep. Carol Ode]: So if I'm a Vermonter,

[Rep. William Canfield]: Yeah.

[Rep. Carol Ode]: I can form trust anywhere in the world and have governed by that jurisdiction.

[Brian Galle]: That is correct.

[Rep. Carol Ode]: Which begs the question, why would we even change whatever it is we're doing? I'm not sure what we're doing.

[Brian Galle]: Right. So, what has been the driving force for states to change their trust laws since about 1995 when Delaware kind of kicked off this process is that states compete for trust business in the sense that there are a relatively small number of jobs that can be created by being the place where people want to hire a trustee. Again, with the assumption that usually the trustee wants to be in a place where the where the trust is also governed. Right. So South Dakota trustees want want to run trusts that have South Dakota law. So South Dakota has tried to establish a trust law that is attractive to out of staters and the main way that they've done that is they've changed the rules for South Dakota trusts to make it easier to escape the federal estate tax. And so people who are trying to minimize their federal estate tax are more likely to establish a South Dakota trust because it helps them to get out of the federal tax, doesn't cost South Dakota anything except to the extent that South Dakota rail residents are now paying a little bit more in federal tax, and there are maybe, you know, now 10 more jobs in South Dakota than there used to be running those trusts. Good. So what are other than avoiding the federal state tax, which I'll talk more about later, Vermont you probably know also has an estate tax. South Dakota trust can be used to escape the Vermont estate tax. So the kind of the ordinary business uses for a trust are broadly speaking like asset protection. So the trust is a separate entity from you and so when you put assets in the trust, if certain legal conditions are met, those assets are no longer yours. And so a creditor often can no longer get to those assets. There's a complicated set of rules for when that's true. There's a body of law called fraudulent conveyances. Usually you can't put money, you can't put an asset in the trust after you already owe someone money and expect that they can't get at that asset, for example. But a common reason that people will put, let's say, their primary residence in a trust is to protect it from potential future creditors. The other reason a lot of people commonly put their house in a trust is for estate planning. So you may know there are two main ways to pass asset to death. One is through the probate process, which is supervised by a court and is totally public. All the assets that pass through probate can be inspected by someone who goes to the courthouse. And that's primarily so that creditors of the decedent can see what's available to pay off the creditor. The probate process can be slow and in most states it's a little bit costly because the there are fees for the probate administrators that are based on the size of the estate. Essentially no one with lawyers today uses the probate process and instead uses trusts. So trusts are totally secret. We don't have a sense of whether they are more or less expensive than probate. They're certainly faster than probate. And so typically you put your primary residence in a trust well in advance of when you expect to die so that your kids can get it quickly and secretly. And it's somewhat of a mystery to people who studied this area why states allow trust to be totally secret while probate is totally public. And presumably that's a thing you could change. Good. So I don't know if you have follow-up questions about any of those things.

[Rep. William Canfield]: You were talking about South Dakota. Yeah. And folks can escape the federal tax. Who pays the rest of the state? You briefly mentioned that.

[Brian Galle]: Well, right. So if a billionaire, for example, is able to escape the estate tax by using a South Dakota trust, then that billionaire is not contributing to the federal budget, so all the rest of us have to pay a little bit more.

[Rep. William Canfield]: All the rest of us nationwide?

[Brian Galle]: Yeah, exactly. Go ahead, ma'am.

[Rep. Carolyn Branagan]: I have a question.

[Rep. William Canfield]: Branagan has a question.

[Rep. Carolyn Branagan]: So I don't see why it's beneficial to a state to even have a structure to allow trusts within the state. How does it benefit the state to have these things?

[Brian Galle]: Yeah, again, there's some of these ordinary uses for trusts are are probably beneficial in the sense that, for example, asset protection. You might think if I thought that when my business failed I might lose my house, I might be more reluctant to to start a new business. Right? Maybe I have this. I'm a really skilled woodworker and I want to start making cabinetry, but I'm afraid, you know, if I end up not being able to make the payments on the on the woodworking equipment I bought, I'm going to lose my home. You know, then probably my spouse is not gonna let me start the woodworking business or whatever. So that's a thing that trusts do. You know other business entities can also do that. Another common use for trusts is to make sure that there are assets available in the future for, for heirs who won't be in a position to spend the money wisely themselves. So for example, think of a child who has some cognitive deficits and you want to leave money for that child and you want someone who's more capable of managing money responsibly to, to hold the assets and manage them on behalf of that child and, know, pay rent for that child throughout their lifetime.

[Rep. Carolyn Branagan]: Thank you. Sure.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: You're saying it's really, it's an economic development tool, it doesn't really work if you have laws that favor the establishment of trusts in order to avoid paying federal taxes. You said 10 jobs in South Dakota, it's not a great Delaware with their easy way of forming corporations has a better track record of that or not.

[Brian Galle]: Right, yeah, I think at this point it would be difficult for other states to compete with South Dakota or Delaware by making trust even more friendly for federal tax avoidance. I think those industries are pretty well established. You're probably not winning that race.

[Rep. William Canfield]: It may be that you have

[Brian Galle]: I'm sorry. Go ahead.

[Rep. Carolyn Branagan]: No. Please finish your thought there.

[Brian Galle]: I was just gonna say, you you should certainly take testimony from, you know, people who are professional trustees in Vermont and see if they have different views about that, but that's my impression.

[Rep. Carolyn Branagan]: Are there states that blanketly disallow trusts or is it something that a state has to pass a lot to allow or how does that work?

[Brian Galle]: States, there it's it's a creation of state law. And so if there were no Vermont trust law then there wouldn't be Vermont trusts, but there would still I'm sure be trusts in the other 49 states and in at least in tax havens around the world. There are a lot of countries that don't have trusts and do just fine. For example, Germany does not have trusts and their economy is pretty good.

[Rep. William Canfield]: So, Representative Bodin, did you have another question?

[Rep. Carol Ode]: Yeah, I'm glad we're going to get we want to get testimony from the Massar Association I guess could Vermont be more trust friendly and would it create jobs? It's something I kind of would like to hear from the field about. And then also, I didn't understand something. You said earlier, when a billionaire escapes the estate tax, then we all pay more. Are you assuming that every year there's a budget for how much is going to be paid in estate taxes? And then if it's $1,000,000 and the billionaire paid zero, we all have to fill out that $1,000,000 bucket? I didn't understand your comment.

[Brian Galle]: Yeah, that's my assumption, right? When Congress draws up the federal budget, there's an expectation that the estate tax is gonna bring in $10,000,000,000 a year. And if because of South Dakota's efforts, brings in $9,000,000,000 that extra billion has to come from somewhere might come from federal borrowing that we're all going to have to pay off someday, but it comes from somewhere.

[Rep. Carol Ode]: Oh, it's been budgeted. Yes. That's their budget. It's a function of how they're budgeting.

[Brian Galle]: Exactly.

[Rep. Carolyn Branagan]: Representative Branagan. So, okay, so you can probably tell this is the first day we have dug into tech and what they are. It's the first day, the first fifteen minutes. So you're getting them.

[Rep. Carol Ode]: We're all material here.

[Rep. William Canfield]: That's great.

[Rep. Carolyn Branagan]: So I apologize if our questions are really simple, but you said that we ought to take testimony from professional trustees. Wow, are there really professional trustees and do you have to get paid to be a trustee? Think I used to be a trustee of my mother's trust. I didn't get paid because some people get paid to do that.

[Brian Galle]: There are professional trustees. For small trusts where the trust assets, for example, might just be a home or something, like you said, it's common for the trustee to just be a family member or other trusted friend, but for larger trusts with significant assets, it's more common to pay professional. Usually this is someone who's training as an investment manager. And so for example, one common trustee is someone who works at a bank and has an MBA and has experience in trying in deciding how to invest to the trust assets to maximize the return for future beneficiaries?

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: Quite a few trust departments in the state. Yes. Representative

[Rep. William Canfield]: Masland.

[Rep. James Masland]: Yeah. This may be let me start in different start the paragraph different, sir. We frequently work here with tax expenditures. We have all kinds of things that are that are tax expenditures, and we don't collect tax, and we set things up that way. So I'm guessing that trust, as you are discussing, indirectly anyway, become to the extent that we don't tax them, their Taxes that are not not collected. So in a in a roundabout sort of way, it's a tax expenditure. Is that correct? Or would you phrase it differently?

[Brian Galle]: Agreed, and I'm about to come to that, but I yeah. Think Yeah. Yeah. I'll I'll stop there. Yeah.

[Rep. William Canfield]: Representative Page. I was just

[Rep. Woodman Page]: gonna ask, once you put your money in a trust, you lose control over it. The executor or the trustee controls it. How would you receive monies from it, if any?

[Brian Galle]: Right. It depends. So the trust is a very flexible entity and essentially you can create a set of rules for the trust with any combination of you continue to direct the trustee about how to spend the money all the way to the at the far extreme other end, you have no say over how that money is spent. It is entirely within the discretion of the trustee. Although usually that discretion is constrained because you provide the trustee with a list of beneficiaries. Right? So you say, I'm going to give you this money and you're going to distribute it only to my my children and their direct descendants, but you decide how much and when to make those distributions for instance. But you know tax law it turns out will make distinctions between you know that extreme kind of trust where the person who puts the money in, who, you know, trust mavens call a grantor or a settlor, but we can just call it the funder, the person who puts the money in. So that extreme kind of trust where the funder essentially gives up all control to the trustee subject to a set of pre written instructions for the trustee versus trusts where the funder still has some say over what's going to happen to the trust. Get taxed very differently, But it's common, so the trust that people use to hold their personal residence usually is a trust where they give control to the trustee, but they can take back that control at any time. So this is usually called a revocable trust because they can revoke the transfer of the property to the control of the trustee.

[Rep. William Canfield]: Representative Holcombe?

[Rep. Rebecca Holcombe]: I was hearing from a constituent recently, in our state, if you have an adult child with a disability, a pretty significant disability, you're really on your own. And this is a very significant concern via the state with an aging population and no solutions and have been unable to come up with solutions for them. And some folks are setting up trusts to provide for their adult children in perpetuity because they're in their 80s and they don't know what's going to happen. Are there any states that differentiate for that specific kind of purpose? Because I think trusts are used for many, many different kinds of purpose, and I don't really know what I would do if I had an adult child with a disability and was looking at not being around.

[Brian Galle]: Right. I agree with you. That's a common use for trusts. So another reason to hire a trustee is because you think you might not make good decisions with your money and you want to make sure that your children are provided for in that part of your life. Or you might balance, you know, some people might worry is my is my child going to put me in the best situation or just the cheapest situation, and you might want the trustee to make that decision. I'm not aware of states that have distinct rules for that category of trust. Again, the trust concept is flexible enough that most people can usually get that result if they want to just by writing the trust rules appropriately.

[Rep. William Canfield]: Representative Burkhardt.

[Rep. Bridget Burkhardt]: Professor Galley, is there a place that you would direct us to for reading? Just some place that's more of a primer on trust in general that is geared toward folks who are just getting up to speed and then potentially a place that might have a little bit of a survey. Like for example, we've been working a lot on education funding. There's Education Commission of the States that looks at education funding across all different states. Is there a place to go that would do comparisons of different states' trust law and all that?

[Brian Galle]: Good. I can certainly try to track down those materials and I was in touch with Sorsha and I'm happy to try to pass some of those along, but good places to look. There's an organization called the American College of Trusts and Estates Council ACTEC, ACTEC. They have some good explanatory materials and NCSL has some materials comparing trust rules across states, but they're mostly focused, the materials I'm familiar with are mostly focused on this thing that first year law students know very well called the rule against perpetuities. So in historically, trusts had a limited duration unless they were charitable trusts. So you, the idea was you couldn't control the few, the far future. You could only essentially control kind of one generation past your children's generation. But one of the ways in which South Dakota and Delaware and states like that, Arizona, have competed for trust business is by eliminating that rule and allowing you to have essentially perpetual trusts. And NCSL has a little summary of that evolution.

[Rep. William Canfield]: So I want to ask about Representative Page touched on it, said the executor. So an executor of an estate, probably goes through probate. Is the pay, is the compensation the same for a trustee?

[Brian Galle]: It is similar, but usually the executor's pay is set by statute, whereas the trustee's compensation is negotiated. So a common fee for trustees is something like one to 2% of assets under management each year.

[Rep. William Canfield]: Anything else, committee?

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: Yeah, so I mean,

[Rep. Carolyn Branagan]: it's probably a lot, but in

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: terms of as the Ways and Means Committee are interested in the revenue that might be either foregone or generated. So, could you speak to that?

[Brian Galle]: Yeah. So, I have a lot to say about taxes, and I'll to be brief. You tell me if I get too deep in the weeds. So, there are two main ways in which trusts are used for tax planning at the state level. One is an income tax strategy, and the other is an estate tax strategy. So I'll first tell you about the income tax strategy, because I think it's more worrisome from a budget perspective. So the state tax strategy, I'll come to later, is more complex. The income tax strategy, I think, is pretty straightforward to solve for Vermont. So let me say what I think the loophole is. But first I I need to give you some background. So the basic income tax strategy is to move streams of income across state borders to a place with a 0% income tax while still living in Vermont. So how do you do that? Well, the trust is a separate taxpayer from you and so what you do is you take income producing assets and you put in put them in the trust. Or similarly let's say you have highly appreciated investments before you sell them you put them inside the trust. I'm sure you know that in the Vermont income tax like all essentially income taxes, appreciated investments aren't taxed except when they're sold. Now you you have a few problems if that's your strategy. Right? The first is how do you make use of that money? If it's inside the trust, how do you actually spend it? And there are a few answers, right? One answer is, well, you weren't going to use that money anyway. It's money that you were going to pass to your children, in which case you're perfectly happy to have it inside the trust and have the trust distribute that money to your children later. Other answer is you could borrow money from the trust and loans aren't taxable as income. Now there are two obstacles for a tax planner to use this like very basic strategy of just having all of their investments, you know, inside a South Dakota or Nevada trust rather than held directly by themselves as a Vermonter. You got to get the money into the trust without it being taxed, and then you have to convince Vermont not to tax that trust. So in most states it's the first step that's really hard, and that's because it, you know, there's a both a federal gift tax and often a state gift tax. So transferring the money to the trust triggers this gift tax. But it turns out that there's this maneuver tax lawyers have come up with.

[Rep. William Canfield]: Go ahead.

[Brian Galle]: The maneuver tax lawyers have come up with is they're able to argue that the trust is not quite a totally separate person from the person who funds the trust because that person still has a little bit of control over the trust that you know they might have the ability to change some of the beneficiaries, let's say. And that's enough so that it doesn't trigger federal gift tax, right? If the federal gift tax is triggered when property is transferred without payment from one person to another. So this is sometimes called an ing, an incomplete non grantor trust. What's incomplete about it is it doesn't count as a complete gift for federal gift tax purposes. New York has somewhat foiled that part of the strategy by taxing the transfer of the assets into trust as if it were a gift, you know, essentially breaking from federal law. Now Vermont, my understanding is doesn't even have a gift tax, so that probably wouldn't be your solution. Vermont actually looks like on the books has a pretty good solution at the second step, right? So Vermont's definition of a resident trust is any trust that got money from somebody who is from a person domiciled in Vermont. So that looks like a good solution because it seems as though the South Dakota trust or even the Cayman Islands trust is still a Vermont resident and should be taxed in Vermont. Why? Because that trust got property from a Vermonter. However, there's a big loophole. And the big loophole is this. I can put money in one South Dakota trust and then have that South Dakota trust put put that same money into a second South Dakota trust. Now here's the problem. The second South Dakota trust will not be a Vermont resident. And that's because the first trust, although it's a Vermont resident, is not a person domiciled in Vermont. Right, so that's to say that the the Vermont definition of a trust doesn't have related party roles. 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. That's my reading of the law. I didn't have an opportunity to do a lot of research on on whether there are Vermont cases about that loophole. I couldn't find any. So it seems to me it's possible as a wealthy Vermonter to put your money in a trust that doesn't count as a Vermont resident, sell your appreciated assets, never pay any tax to Vermont. And if that's right, it seems like there could be a pretty easy targeted solution there. For example, I'm one of the co authors of the text for the California billionaire tax, which is not yet law. We hope it will be on the ballot in November. And we have language addressing exactly this problem in California.

[Rep. William Canfield]: Wait a question. Representative Page?

[Rep. Woodman Page]: Yes, I'm just curious, just thinking about this situation with two or three different trusts in South Dakota. If I had received money through ill gotten gains of some sort, criminal actions or what have you, I would suppose that this is another way of hiding your money without

[Rep. William Canfield]: selling people

[Rep. Woodman Page]: without accounting for it.

[Brian Galle]: India and there's an organization called ICIJ there. I think it's the International Consortium of I forget what the second I stands for, the last J is journalists, and so they were the people who received leaks of some of the doc, the so called Panama papers. These, Panama papers were, documents of this organization, MOSAQ Fonseca, which they were essentially trustees of, Panama trusts, which were used among other things for global money laundering. And what you know what you see in those papers, I haven't seen them. The reporters tell me this is, yeah, you see layers of trusts, right? A trust with a beneficiary. That's another trust with a beneficiary. That's another trust with a beneficiary. That's, you know, an LLM in the Channel Islands or something. And the idea is exactly to make a paper trail that's like too dense for law enforcement officials to follow back to its source. And this is somewhat a problem for tax administration too, although the since 2010 IRS has made some progress by entering into these information sharing agreements with countries around the world, including countries like Switzerland that used to have bank secrecy that made it very hard to get those data. My guess is that the Vermont Revenue Authority has a revenue sharing agreement with IRS so that it also has access to that information about foreign trusts, but I don't know that.

[Rep. Woodman Page]: And I guess the other question is. In the past, you know, after World War II searching for valuable art and monies that were taken from Germany and hidden in Swiss banks. Eventually The US was able to access information. So if they can access, if in the past we accessed that information, then I would imagine that we could access this information currently.

[Brian Galle]: That's true, you know, before 2010 the hard part was you had to essentially know the specific asset you wanted to ask the Swiss about, and you had to have some reason to think that it was essentially ill gotten gains. And that was often very hard to do, especially, you know, if you didn't know somebody was committing tax evasion, you didn't know to ask the Swiss about whether they have that person's money. And so the, you know, now there's an affirmative obligation for foreign financial institutions, including trustees to report large US account holders to to the IRS. Really, they report it to their government and then their government shares it with the IRS.

[Rep. William Canfield]: Yeah.

[Brian Galle]: The other thing that I'll mention briefly is how you use trusts for estate tax avoidance. I'm sure you probably know Vermont has a 16% estate tax with a $5,000,000 exemption amount. I wasn't able to find readily how much revenue that estate tax raises. My guess is not very much, And I think my reading is you have one of three policy options here available to you, which is either currently are very few other US states that have a meaningful estate tax. That's because you you probably know the federal government used to have a 100% credit for state estate taxes, essentially just kind of encouraging states to have the estate tax because why not? Didn't cost your residents any money. And they changed that to a deduction from the estate tax. So, you know, the Vermont estate tax now imposes a meaningful burden, and your exemption amount is considerably lower than the federal exemption amount. So that's unusual. Think there are only five or six other states that still have a robust estate tax. So your question is, you know, to have an estate tax on paper, which I think is the current situation, move to having no estate tax or make changes to have a meaningful estate tax. Here's why I think your estate tax is currently like only on paper really, and that's because it's trivial to use trusts to avoid it. If I take money and I put it in a trust, if I have sufficiently few levers of control over that trust, Right? Remember I talked about, like, the extreme version where only my trustee is making decisions in the future. That trust is no longer part of my estate. It's not considered to be in my control anymore at death. And therefore, when I die, that trust's assets are not taxed. And so, you know, I say it's trivial to escape the Vermont estate taxes. All you have to do is put the money in a trust. As long as you're willing to give up sufficient number of these levers of control to a trustee, trust will never pay, the Vermont estate tax. There is a potential federal gift tax obstacle to getting money into the that trust, but the techniques for avoiding the federal gift tax are very well known, and I I passed on to Sorsha an article of mine where we, you know, explain what those techniques are. You can find them on the web. Like, tax lawyers openly boast about how easy it is to escape the estate tax if only you hire them. I believe them.

[Rep. Carol Ode]: There

[Brian Galle]: are, I think, ways of, you know, mitigating that situation. There's a federal anti abuse rule called the generation skipping tax generation skipping transfer tax technically, which essentially would when that when that trust makes distributions to heirs, those distributions then become subject to the estate tax. Right? So eventually the estate tax catches up to the trust. You could add a provision like that. Vermont used to have a GST and repealed it. You could restore it, although the old version of the Vermont GST I think wasn't very effective.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: That's the generation skipping trust you're talking about.

[Brian Galle]: Right. But the what's a little misleading about the name of the federal GST is it's not really just about generation skipping transfers or like when a parent leaves money to their grandchildren, generation skipping, skipping their kids. It does do that, but the main thing that the GST does is tax these trusts that are outside the decedent's estate. So again, I don't know how important the Vermont estate taxes to your budget. I think that the estate tax is, you know, something of a footnote to the income tax planning opportunities. But I do think the income tax planning opportunities should be pretty easy to deal with. You know, there's also kind of a compliance angle there, you know, in that making sure that trusts that are outside Vermont, particularly non US trusts, are aware that they are Vermont trusts and should be paying tax. But, you know, aside from that kind of administrative wrinkle, I I think that the legislative language is straightforward.

[Rep. Carol Ode]: It screams what? Mean, I'm losing the last, like, three or four words in your sentence.

[Rep. Woodman Page]: It's

[Brian Galle]: Oh, okay. I'm sorry. So I I think that the income tax planning fix would be straightforward. At least legally there might be some practical questions about, you know, let's say there's a Vermonter who has a Leichtenstein trust, which is common for wealthy Europeans. Does the Leichtenstein trust administrator know that because they got money from a Vermonter that trust is a Vermont taxpayer? Probably not. And so there's this practical question of how does Vermont audit the these remote trusts? How does it make sure even that a trust trustee who wants to be compliant is aware of their Vermont obligations? Certainly we could think about ways to make that administrative piece easier for the Vermont Revenue Agency.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: I have a few questions just to level set. In terms of what do you think is a minimum size of assets in order to create a trust? That a general is there a rule of thumb that we should be thinking about?

[Brian Galle]: It's not free to set up a trust, but depending on how you're expensive or how expensive your lawyer is, it can be relatively straightforward process. So sometimes under $1,000 to to set up a a kind of very standard revocable trust for your family residence. So I think it's not typically huge amount of assets, probably, you know, more than $20,000 I think.

[Rep. Carol Ode]: Wow. Okay.

[Brian Galle]: But on that order, probably if it were less than that, you probably wouldn't bother unless it were a very special situation. Again, like an individual who needed a particular kind of care that you weren't sure you'd be around to provide.

[Rep. William Canfield]: Was the cost similar to establish an irrevocable trust?

[Brian Galle]: I think so. What makes the irrevocable trust more expensive in the long run is you have to pay the trustee to make the decisions, whereas revocable trust often you're still making the decisions so you don't need to pay anybody to do it.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: And The trusts are separate entities, they're domiciled in Vermont, then they're also subject to Vermont's income tax if the trust is generating income.

[Brian Galle]: Correct. Although again, I would just caution you that the statute does not use the word domiciled. It's a word that you use for corporations, but not for trust. So you define the trust as a Vermont resident, and you don't use the word domiciled, and that's why we have this loophole that I'm talking about.

[Rep. William Canfield]: Okay. Yeah. Representative Branagan.

[Rep. Carolyn Branagan]: I think I know the answer to this, but how does the trust earn its own money?

[Brian Galle]: So the trust has titled to some amount of assets that the funder transferred to the trust and then the trust typically will invest or manage those assets.

[Rep. Carolyn Branagan]: Could put

[Brian Galle]: a business, you could put like the family business inside a trust for example and then the family business profits or trust assets.

[Rep. Carolyn Branagan]: Okay.

[Rep. William Canfield]: So

[Brian Galle]: this is common for especially ultra wealthy individuals. So for instance, if you have a tech startup, you'll put most of the stock of that business in a trust so that it's outside your state before it kinda goes up in value. But you'll keep all the voting shares for yourself. So the profit ends up in the trust, but the control is still in your hands.

[Rep. Carol Ode]: And

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: if someone is a beneficiary of the trust, so they're getting any income that's generated from the trust, then those proceeds are also taxable.

[Brian Galle]: Correct. So the way that the tax of the trust usually works is the trust is taxed on its income, but the trust gets a deduction for any benefits it pays out, and then the beneficiary is taxed on those benefits as income. So only one of the trust or the beneficiary is taxed on a particular dollar.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: So the beneficiary may owe taxes if the trust does well, even if the beneficiary didn't get any money?

[Brian Galle]: Well, only the beneficiary actually only if the trust actually distributes money to the beneficiary is the beneficiary taxed.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: Yes, okay.

[Brian Galle]: Or if the beneficiary, you know, was given money by the trustee and said, no, let's leave it in the trust, then the beneficiary is still taxed and the trust isn't.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: Is Vermont unusual in trying to consider any assets from a Vermonter donate to a trust in a different location as being having a Vermont is unique in that?

[Brian Galle]: Not unique, but unusual. There are only a handful of other states that have that rule. Many states have a rule that the the only trust that our residents are trusts where the trustee is in the state. But this creates a lot of tax planning opportunities and and so their their trust tax law ends up being much more complicated. So, for example, California has this rule where the residents of the trust depends on where the trustee is. So you have all these rich Californians with trusts in other states, and then California has this complicated rule for what happens when the California beneficiary gets money from that out of state trust.

[Rep. William Canfield]: Representative Ode.

[Brian Galle]: Go ahead.

[Rep. Carol Ode]: A while ago you said the estate taxes, footnote to the income tax, and then you went ahead and talked about different ways that Vermont might not be able to collect the tax that it's owed like if it was a if it were a Lichtenstein trust, because the administrator doesn't even know it's Vermont taxpayer and how does Vermont administer the how does the taxes really go in and try to administrate the taxes?

[Brian Galle]: Yes.

[Rep. Carol Ode]: Get the taxes, collect the taxes. So, your summation of trusts just to just kind of leave it where it is? Or do you want to say that something has to be done? If you think something has, leave it as it is, then we could move on to the other thing. If you think there's something that we can do and if we did x, these things would happen, then maybe you could say that now so you can kind of move on if we're really not gonna do anything.

[Brian Galle]: Yes. So I think that you should make a change, a technical change to the definition of what is a resident tax, a resident trust in Vermont. And that is because right now it is too easy in my view for wealthy Vermonters, you know, good for them, but you know, it's too easy for them to put money in out outside of Vermont and escape Vermont income tax. I think unfairly. And I think it's a narrow fixed, you know, very technical fix, but pretty, it seems to me pretty easy. Although, you know, it potentially carries these administrative complications you talked about. On the go ahead.

[Rep. Carol Ode]: So, if this if there are decisions to do this

[Brian Galle]: Yes.

[Rep. Carol Ode]: What would it bring the state of Vermont?

[Brian Galle]: Well, right. So, it's hard to know how much money you're not getting right now. You know, this is income that's not being reported to Vermont, and it's always hard to know how much is not being reported.

[Rep. Carol Ode]: So would you think we should do a study on that or how to get that done?

[Brian Galle]: I think it would be feasible to ask the revenue authority to investigate. Know, they may say back, don't we don't think this is a loophole that anyone is aware of or is it's using, in which case the only revenue benefit is you've closed off a possible future loss of revenue. So yeah, I think it's it's it would be good to have the views of, you know, local tax experts, you know, certainly the folks who work for you. I find the urgency of the problem, but it seems to me that fixing the problem is pretty low cost and you might as well.

[Rep. Carol Ode]: So I was thinking when you said that it's asking someone to get the data, I put in Department of Taxes, but you're also, it would be Department of Taxes and also professionals in the field like a CPA and a lawyer or not?

[Brian Galle]: I mean, I had in mind the Department of Taxes, but certainly you could ask. I wouldn't expect you to get a candid answer from tax advisors in Vermont on, are you using this loophole?

[Rep. Carol Ode]: Fair enough.

[Rep. William Canfield]: So

[Rep. Carol Ode]: maybe they'll say nothing's really being done, in which case for the future, it closes the loophole. Yeah. But if they say something's being done, then we could at least look at what the numbers, what they think the numbers are.

[Brian Galle]: Agree. But I think their numbers will be a guess.

[Rep. Carol Ode]: I'm sorry.

[Rep. William Canfield]: Will be

[Brian Galle]: a guess.

[Rep. Carol Ode]: Will be a guess.

[Rep. William Canfield]: Representative Branagan has a question.

[Rep. Carolyn Branagan]: So I've got a couple of things. First, I just wanted to share that in my experience here in Vermont, I find that tax professionals are extremely ethical. And although they may be making use of the laws, I'm talking about the attorneys and the CPAs and the accountants who aren't CPAs. Really think they try to be honest and to follow the law. And if we make a law that allows them a loophole, they don't, it doesn't bother them to follow the law. Of course. But if we, as legislators, if we see a place where there's a loophole, I think we are all interested in the essence of tax fairness to plug that loophole. So that's one thing I just want to share with you. But then also, as you were talking about that someone could put a business inside of trust, I'm a school teacher by trade.

[Rep. Carol Ode]: So I

[Rep. Carolyn Branagan]: never thought of putting a business in a trust. But if that happens, what happens to those taxes? The taxes that then business have to pay would be a corporate tax, right? Not the estate tax, not the income tax, but it's a corporate tax. Correct. How does the tax department keep track of that? And how do they know that that money isn't just staying in the trust and accumulating? How do they fess up and make sure that that's because Sorry. Yeah.

[Brian Galle]: No. So just to be clear what I mean when I say put the business inside a trust. What I mean is that you transfer ownership of the shares of stock that represent control of the business to the trust. So now the trust owns the business, but the business might still be incorporated and still subject to the Vermont corporate income tax. The question is what happens to the taxation of the profits from that business, which ordinarily would be taxed again. Right? You have two layers of tax when you have a corporate income tax, would ordinarily be taxed to the individual shareholder and now flow to this trust. If the trust is not a Vermont resident, then that layer of tax is escaping from your tax system, whereas previously it would have been taxed to the business owner. And so that's kind of one of the strategies that I'm suggesting might be available through this loophole.

[Rep. Carolyn Branagan]: I understand. Okay, thank you. That's all.

[Rep. William Canfield]: Representative Ode.

[Rep. Carol Ode]: So let's just say that another state has closed this loophole. Do you know how people get around that loophole? How we

[Rep. Carolyn Branagan]: get around and fix

[Rep. Carol Ode]: There always seems to be a way around. So, I just wonder if it was Jason or Tim.

[Brian Galle]: It's a fair question. There are other similar ways of trying to accomplish this goal. They don't work as well as a trust and there can be more expensive. So a thing, for example, you could do is have a corporation in another jurisdiction that, that holds the Vermont Corporation. And again, there are, you know, there are some states that try to block that strategy through a variety of measures, which we can could talk about if you ever get to that point. But, the I know, representative Kornheiser is not here. One general solution to this problem is to have a wealth tax.

[Rep. Carol Ode]: What?

[Brian Galle]: It is to have a wealth tax because the wealth tax would would reach the value of all of the different pockets, you know, holding companies, trusts, whatever it is that the that the Vermont individual has, wherever they are in the world. And in general, it's harder to escape while still being a Vermont resident than the income tax. But obviously, that's kind of that's a big solution to what might be a relatively small problem. There's obviously trade offs there.

[Rep. Carol Ode]: I think that the decision was made a couple of years ago, but it's a whole country goes that way. Maybe the whole world, your people will skip that. So, more they'll leave Vermont.

[Brian Galle]: Right. That's a longer conversation. I helped represent Kornheiser write that earlier text. So, I have views on whether it's achievable at the state level, but we can have another hearing about that some other time.

[Rep. Carol Ode]: Are you going to talk next about the income tax? Or no? Oh, you're just doing tests? Yes. I

[Brian Galle]: gave you a lot. It's a lot to absorb.

[Rep. William Canfield]: Thank you, Professor Golly.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: Thank you.

[Rep. Carolyn Branagan]: Got a question for you.

[Rep. William Canfield]: One more.

[Rep. Carol Ode]: Notes show

[Rep. Carolyn Branagan]: that you, oh wait a minute, I lost it. I thought I wrote it down. You gave us one recommendation that is something that we should change.

[Brian Galle]: Yeah, it's the definition of a Vermont resident trust and I'm happy to share with your staff that exact language.

[Rep. Carolyn Branagan]: Oh, I'm sure we'd like that. Yes, great, thank you.

[Brian Galle]: Sure.

[Rep. Woodman Page]: I have another question. Go ahead. By creating a wealth tax or a change in the definition of a Vermont resident, and by collecting these monies, what effect will that have? And I heard this recently on, think it was public radio, talking about the charities that lose out by the increasing of taxes such as perhaps this. Do you have any comment on the downsides or the downside of doing these types of things?

[Brian Galle]: So it's usually the opposite. The evidence is that higher tax rates lead to more gifts to charity And that's because we have things like the charitable contribution deduction. So the charitable contribution deduction becomes more valuable, the higher your effective tax rate. And so if wealthy individuals in Vermont can easily escape the income tax and the estate tax, then the charitable deduction from the income and estate tax isn't useful to them. And so it's not much of an incentive. So if you make the income tax kind of more meaningfully binding on these individuals, then there's more in it for them if they make a donation.

[Rep. William Canfield]: The donations do not have to be in Vermont.

[Brian Galle]: They do not. That's true. In fact, you're not allowed to limit it to Vermont. The Supreme Court said that.

[Rep. William Canfield]: Representative

[Rep. Carol Ode]: Woodman. Have you looked at our law, the Vermont tax law that has to do with charitable contributions? And if so, have you anything to say about whether it is written in a way, how different is it from other states and how beneficial is it to analyze the law for me, please?

[Brian Galle]: Yeah, it's a fair question I have, but it was probably in 2017. So I can't remember exactly what my thoughts were from that time. But I'd be happy to come back at some point and talk about that if that's a thing that's of interest.

[Rep. Carol Ode]: I remember when we changed it, United Way and others came and said, please don't change this law to what we now have, but I don't remember why they said that.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: Stabilization.

[Rep. William Canfield]: Yeah.

[Rep. Carol Ode]: I like that whole thing that's not about that because it's we make certain changes that might be considered that we'd have to make the changes to possibly without people doing charitable contributions.

[Rep. William Canfield]: Okay. Thank you, Professor Chittenden.

[Brian Galle]: Thank you all. Appreciate the opportunity to talk to

[Rep. William Canfield]: you. Thank

[Brian Galle]: you. Take care.

[Unidentified Committee Member (possibly Rep. Charles Kimbell)]: I'm gonna go out and get a truss.

[Rep. Carolyn Branagan]: It can't be done in fifteen minutes.

[Rep. Woodman Page]: Just kidding.

[Rep. William Canfield]: Oh, yeah, it's okay. We're gonna take a fifteen minute break. Our next gas is from up by ourselves.