EXHIBIT 10.16.2

             VARIABLE TRUST UNDER AGREEMENT WITH DUDLEY H. DAVIS
 

      This Trust Agreement is made this 20th day of December, 1995, by and 
between THE MERCHANTS BANK (the "Bank") and THE MERCHANTS TRUST COMPANY (the 
"Trustee"). 
 
                                 Background
                                 ----------

      1.  The Bank has entered into an Agreement with Dudley H. Davis 
("Davis") of even date herewith (the "Agreement") pursuant to which, among 
other matters, the Bank and Davis have agreed that the Bank will pay to 
Davis, in lieu of amounts otherwise due to Davis under a so-called Officers' 
Salary Continuation Plan, the amounts specified and provided for in the 
Agreement. 

      2.  The Bank wishes to establish a trust (hereinafter called "Variable 
Trust") and to contribute to the Variable Trust assets that shall be held 
therein, subject to the claims of Bank's creditors in the event of the 
Bank's Insolvency, as herein defined, until paid to Davis and his 
beneficiaries in such manner and at such times as are specified and provided 
for in the Agreement. 

      3.  It is the intention of the parties that this trust shall 
constitute an unfunded arrangement and shall not affect the status of the 
Agreement as an unfunded plan maintained for the purpose of providing 
deferred compensation for Davis for purposes of Title I of the Employee 
Retirement Income Security Act of 1974. 

      4.  It is the intention of the Bank to make contributions to the 
Variable Trust to provide itself with a source of funds and resources to 
assist it in the meeting of its liabilities under the Agreement. 
 
                        N O W ,  T H E R E F O R E ,


      The parties do hereby establish the Variable Trust and agree that the 
Variable Trust shall be comprised, held and disposed of as follows: 
 
      Section 1.  Establishment Of Variable Trust. 

      (a)  The Bank hereby deposits with the Trustee, in trust, $700,000, 
           which shall become the principal of the Variable Trust to be 
           held, administered and disposed of by the Trustee as provided in 
           this Variable Trust Agreement. 

      (b)  The Variable Trust hereby established shall be irrevocable. 

      (c)  The Variable Trust is intended to be a grantor trust, of which 
           the Bank is the grantor, within the meaning of subpart E, part 
           1, subchapter J, chapter 1, subtitle A of the Internal Revenue 
           Code of 1986, as amended, and shall be construed accordingly. 

      (d)  The principal of the Variable Trust, and any earnings thereon 
           shall be held separate and apart from other funds of the Bank 
           and shall be used exclusively for the uses and purposes of the 
           Agreement and general creditors, as herein set forth.  Davis and 
           his beneficiaries shall have no preferred claim on, or any 
           beneficial ownership interest in, any assets of the Variable 
           Trust.  Any rights created under the Agreement and this Variable 
           Trust Agreement shall be mere unsecured contractual rights of 
           Davis and his beneficiaries against the Bank.  Any assets held 
           by the Variable Trust will be subject to the claims of Bank's 
           general creditors under federal and state law in the event of 
           Insolvency, as defined in Section 3(a) herein. 

      (e)  The Bank, in its sole discretion, may at any time, or from time 
           to time, make additional deposits of cash or other property in 
           trust with the Trustee to augment the principal to be held, 
           administered and disposed of by the Trustee as provided in this 
           Variable Trust Agreement.  Neither the Trustee nor Davis nor any 
           Davis beneficiary shall have any right to compel such additional 
           deposits. 

      Section 2.  Payments to Davis and His Beneficiaries. 

      (a)  The Bank shall deliver to the Trustee instructions (the "Payment 
           Instructions") that indicate the amounts payable to Davis and 
           his beneficiaries under and in respect of the Agreement, or that 
           provide a formula or other instructions acceptable to the 
           Trustee for determining the amounts so payable, the form in 
           which such amount is to be paid (as provided for or available 
           under the Agreement), and the time of commencement for payment 
           of such amounts.  Except as otherwise provided herein, the 
           Trustee shall make payments to Davis and his beneficiaries in 
           accordance with such Payment Instructions.  The Trustee shall 
           make provision for the reporting and withholding of any federal, 
           state or local taxes that may be required to be withheld with 
           respect to the payment of benefits pursuant to the terms of the 
           Agreement and shall pay amounts withheld to the appropriate 
           taxing authorities or determine that such amounts have been 
           reported, withheld and paid by the Bank. 

      (b)  The entitlement of Davis or his beneficiaries to benefits under 
           the Agreement shall be determined by the Bank or such party as 
           it shall designate under the Agreement, and any claim for such 
           benefits shall be considered and reviewed under the procedures 
           set out in the Agreement. 

      (c)  The Bank may make payment of benefits directly to Davis and his 
           beneficiaries as they become due under the terms of the 
           Agreement. The Bank shall notify the Trustee of its decision to 
           make payment of benefits directly prior to the time amounts are 
           payable to Davis or such beneficiaries.  In addition, if the 
           principal of the Variable Trust, and any earnings thereon, are 
           not sufficient to make payments of benefits in accordance with 
           the terms of the Agreement, the Bank shall make the balance of 
           each such payment as it falls due.  The Trustee shall notify the 
           Bank where principal and earnings are not sufficient. 

      Section 3.  Trustee Responsibility Regarding Payments When The Bank Is 
Insolvent. 

      (a)  The Trustee shall cease payment of benefits to Davis and his 
           beneficiaries if the Bank is Insolvent.  The Bank shall be 
           considered "Insolvent" for purposes of this Variable Trust 
           Agreement if:  (i) the Bank is unable to pay its debts as they 
           become due; (ii) the Bank is subject to a pending proceeding as 
           a debtor under the United States Bankruptcy Code; or (iii) the 
           Bank is determined to be insolvent by the federal and/or state 
           regulatory agencies having authority over the Bank and its 
           operations. 

      (b)  At all times during the continuance of this Variable Trust, as 
           provided in Section 1(d) hereof, the principal and income of the 
           Variable Trust shall be subject to claims of general creditors 
           of the Bank under federal and state law as set forth below. 
 
           (i)    The Board of Directors and the Chief Executive Officer of 
                  the Bank shall have the duty to inform the Trustee in 
                  writing of Bank's Insolvency.  If a person claiming to be 
                  a creditor of the Bank alleges in writing to the Trustee 
                  that the Bank has become Insolvent, the Trustee shall 
                  determine whether the Bank is Insolvent and, pending such 
                  determination, the Trustee shall discontinue payment of 
                  benefits to Davis or his beneficiaries. 
 
           (ii)   Unless the Trustee has actual knowledge of Bank's 
                  Insolvency, or has received notice from the Bank or a 
                  person claiming to be a creditor alleging that the Bank is 
                  Insolvent, the Trustee shall have no duty to inquire 
                  whether the Bank is Insolvent.  The Trustee may in all 
                  events rely on such evidence concerning Bank's solvency as 
                  may be furnished to the Trustee and that provides the 
                  Trustee with a reasonable basis for making a determination 
                  concerning Bank's solvency. 

           (iii)  If at any time the Trustee has determined that the Bank 
                  is Insolvent, the Trustee shall discontinue payments to 
                  Davis or his beneficiaries and shall hold the assets of 
                  the Variable Trust for the benefit of Bank's general 
                  creditors.  Nothing in this Variable Trust Agreement shall 
                  in any way diminish any rights of Davis or his 
                  beneficiaries to pursue their rights as general creditors 
                  of the Bank with respect to benefits due under the 
                  Agreement or otherwise. 

           (iv)   The Trustee shall resume the payment of benefits to Davis 
                  or his beneficiaries in accordance with Section 2 of this 
                  Variable Trust Agreement only after the Trustee has 
                  determined that the Bank is not Insolvent (or is no longer 
                  Insolvent). 

      (c)  Provided that there are sufficient assets, if the Trustee 
           discontinues the payment of benefits from the Variable Trust 
           pursuant to Section 3(b) hereof and subsequently resumes such 
           payments, the first payment following such discontinuance shall 
           include the aggregate amount of all payments due to Davis and 
           his beneficiaries under the terms of the Agreement for the 
           period of such discontinuance, less the aggregate amount of any 
           payments made to Davis or his beneficiaries by the Bank in lieu 
           of the payments provided for hereunder during any such period of 
           discontinuance. 

      Section 4.  Payments to the Bank.  Except as provided in Section 3 
hereof or on account of the Bank's direct payments pursuant to Section 2(c), 
the Bank shall have no right or power to direct the Trustee to return to the 
Bank or to divert to others any of the Variable Trust assets before all 
payment of benefits have been made to Davis and his beneficiaries pursuant 
to the terms of the Agreement. 

      Section 5.  Investment Authority.  The Trustee shall invest $200,000 
of the amount deposited with it pursuant to Section 1(a) initially in shares 
of Merchants Bancshares, Inc. stock.  Except to the extent otherwise 
instructed by the Bank, following such initial investment, the Trustee may 
invest in securities (including stock or rights to acquire stock) or 
obligations issued by the Bank or its affiliates and may dispose of the 
amount of the initial investment in Merchants Bancshares, Inc. stock and 
take such other actions with respect to the Variable Trust assets as 
directed by the Bank, or, in the absence of such direction, as the Trustee, 
in its sole discretion, determines to be appropriate.  All rights associated 
with assets of the Variable Trust shall be exercised by the Trustee or the 
person designated by the Trustee, and shall in no event be exercisable by, 
or rest with, Davis, except that voting rights with respect to Variable 
Trust assets will be exercised by the Bank.  The Bank shall have the right 
at any time, and from time to time in its sole discretion, to substitute 
assets of equal fair market value for any asset held by the Variable Trust.  
This right is exercisable by the Bank in a nonfiduciary capacity without the 
approval or consent of any person in a fiduciary capacity. 

      Section 6.  Disposition of Income.  During the term of this Variable 
Trust, all income received by the Variable Trust, net of expenses and taxes, 
shall be accumulated and reinvested. 

      Section 7.  Accounting by the Trustee.  The Trustee shall keep 
accurate and detailed records of all investments, receipts, disbursements, 
and all other transactions required to be made, including such specific 
records as shall be agreed upon in writing between the Bank and the Trustee.  
Within sixty (60) days following the close of each calendar year and within 
sixty (60) days after the removal or resignation of the Trustee, the Trustee 
shall deliver to the Bank a written account of its administration of the 
Variable Trust during such year or during the period from the close of the 
last preceding year to the date of such removal or resignation, setting 
forth all investments, receipts, disbursements and other transactions 
effected by it, including a description of all securities and investments 
purchased and sold with the cost or net proceeds of such purchases or sales 
(accrued interest paid or receivable being shown separately), and showing 
all cash, securities and other property held in the Variable Trust at the 
end of such year or as of the date of such removal or resignation, as the 
case may be. 

      Section 8.  Responsibility of the Trustee. 

      (a)  The Trustee shall act with the care, skill, prudence and 
           diligence under the circumstances then prevailing that a prudent 
           person acting in like capacity and familiar with such matters 
           would use in the conduct of an enterprise of a like character 
           and with like aims, provided, however, that the Trustee shall 
           incur no liability to any person for any action taken pursuant 
           to a direction, request or approval given by the Bank which is 
           contemplated by, and in conformity with, the terms of the Plan 
           or this Variable Trust and is given in writing by the Bank.  In 
           the event of a dispute between the Bank and a party, the Trustee 
           may apply to a court of competent jurisdiction to resolve the 
           dispute. 

      (b)  If the Trustee undertakes or defends any litigation arising in 
           connection with this Variable Trust, the Bank agrees to 
           indemnify the Trustee against Trustee's costs, expenses and 
           liabilities (including, without limitation, attorneys' fees and 
           expenses) relating thereto and to be primarily liable for such 
           payments.  If the Bank does not pay such costs, expenses and 
           liabilities in a reasonably timely manner, the Trustee may 
           obtain payment from the Variable Trust. 

      (c)  The Trustee may consult with legal counsel (who may also be 
           counsel for the Bank generally) with respect to any of its 
           duties or obligations hereunder. 

      (d)  The Trustee may hire agents, accountants, actuaries, investment 
           advisors, financial consultants or other professionals to assist 
           it in performing any of its duties or obligations hereunder. 

      (e)  The Trustee shall have, without exclusion, all powers conferred 
           on Trustees by applicable law, unless expressly provided 
           otherwise herein, provided, however, that if an insurance policy 
           is held as an asset of the Variable Trust, the Trustee shall 
           have no power to name a beneficiary of the policy other than the 
           Variable Trust, to assign the policy (as distinct from 
           conversion of the policy to a different form) other than to a 
           successor Trustee, or to loan to any person the proceeds of any 
           borrowing against such policy. 

      (f)  However, notwithstanding the provisions of Section 8(e) above, 
           the Trustee may loan to the Bank the proceeds of any borrowing 
           against an insurance policy held as an asset of the Variable 
           Trust. 

      (g)  Notwithstanding any powers granted to the Trustee pursuant to 
           this Variable Trust Agreement or to applicable law, the Trustee 
           shall not have any power that could give this Variable Trust the 
           objective of carrying on a business and dividing the gains 
           therefrom, within the meaning of section 301.7701-2 of the 
           Procedure and Administrative Regulations promulgated pursuant to 
           the Internal Revenue Code. 

      Section 9.  Compensation and Expenses of the Trustee.  The Bank shall 
pay all administrative and Trustee's fees and expenses. If not so paid, the 
fees and expenses shall be paid from the Variable Trust. 

      Section 10.  Resignation and Removal of the Trustee. 

      (a)  The Trustee may resign at any time by written notice to the Bank, 
           which shall be effective thirty (30) days after receipt of such 
           notice unless the Bank and the Trustee agree otherwise. 

      (b)  The Trustee may be removed by the Bank on thirty (30) days' 
           notice or upon shorter notice accepted by the Trustee. 

      (c)  If the Trustee resigns or is removed within five (5) years of a 
           Change of Control, as defined in Section 13(d), the Trustee 
           shall select a successor trustee in accordance with the 
           provisions of Section 11(b) hereof prior to the effective date 
           of Trustee's resignation or removal. 

      (d)  Upon resignation or removal of the Trustee and appointment of a 
           successor trustee, all assets shall subsequently be transferred 
           to the successor trustee.  The transfer shall be completed 
           within thirty (30) days after receipt of notice of resignation, 
           removal or transfer, unless the Bank extends the time limit. 

      (e)  If the Trustee resigns or is removed, a successor shall be 
           appointed, in accordance with Section 11 hereof, by the 
           effective date of resignation or removal under Section 10(a) or 
           10(b).  If no such appointment has been made, the Trustee may 
           apply to a court of competent jurisdiction for appointment of a 
           successor or for instructions.  All expenses of the Trustee in 
           connection with the proceeding shall be allowed as 
           administrative expenses of the Variable Trust. 

      Section 11.  Appointment of Successor. 

      (a)  Except as provided in Section 11(b), if the Trustee resigns or is 
           removed in accordance with Section 10(a) or 10(b) hereof, the 
           Bank may appoint any third party, such as a bank trust 
           department or other party that may be granted corporate trustee 
           powers under state law, as a successor to replace the Trustee 
           upon resignation or removal.  The appointment shall be effective 
           when accepted in writing by the new trustee, who shall have all 
           of the rights and powers of the former Trustee, including 
           ownership rights in the Variable Trust assets.  The former 
           Trustee shall execute any instrument necessary or reasonably 
           requested by the Bank or the successor trustee to evidence the 
           transfer. 

      (b)  If the Trustee resigns or is removed pursuant to the provisions 
           of Section 10(c) hereof and is to select a successor trustee, 
           the Trustee may appoint any third party such as a bank trust 
           department or other party that may be granted corporate trustee 
           powers under state law.  The appointment of a successor trustee 
           shall be effective when accepted in writing by the new trustee.  
           The new trustee shall have all the rights and powers of the 
           former Trustee, including ownership rights in Variable Trust 
           assets.  The former Trustee shall execute any instrument 
           necessary or reasonably requested by the successor trustee to 
           evidence the transfer. 

      (c)  The successor trustee need not examine the records and acts of 
           any prior Trustee and may retain or dispose of existing Variable 
           Trust assets, subject to Sections 7 and 8 hereof.  The successor 
           trustee shall not be responsible for and the Bank shall 
           indemnify and defend the successor trustee from any claim or 
           liability resulting from any action or inaction of any prior 
           trustee or from any other past event, or any condition existing 
           at the time it becomes successor trustee. 

      Section 12.  Amendment or Termination. 

      (a)  Notwithstanding Section 1(b) hereof, the Trustee and the Bank, 
           acting jointly or solely, shall have the power to amend the 
           Variable Trust in any manner required for the sole purpose of 
           insuring that the Variable Trust qualifies and continues to 
           qualify as a "rabbi trust" for purposes of Revenue Procedure 92-
           64, any successor provisions thereto or any other similar or 
           successor provisions of the Internal Revenue Code of 1986, as 
           amended. 

      (b)  The Variable Trust shall not terminate until the date on which 
           Davis and his beneficiaries are no longer entitled to payments 
           pursuant to the terms of the Agreement.  Upon termination of the 
           Variable Trust any assets remaining in the Variable Trust shall 
           be returned to the Bank. 

      Section 13.  Miscellaneous. 

      (a)  Any provision of this Variable Trust Agreement prohibited by law 
           shall be ineffective to the extent of any such prohibition, 
           without invalidating the remaining provisions hereof. 

      (b)  Benefits payable to Davis and his beneficiaries under this 
           Variable Trust Agreement may not be anticipated, assigned 
           (either at law or in equity), alienated, pledged, encumbered or 
           subjected to attachment, garnishment, levy, execution or other 
           legal or equitable process. 

      (c)  This Variable Trust Agreement shall be governed by and construed 
           in accordance with the laws of Vermont. 

      (d)  For purposes of this Variable Trust, Change of Control shall have 
           the meaning specified in the Agreement. 

      Section 14.  Effective Date.  The effective date of this Variable 
Trust Agreement shall be December 20, 1995. 
 
THE MERCHANTS BANK                     THE MERCHANTS TRUST COMPANY 
 
 
By: /s/ Joseph L. Boutin               By: /s/ Rebecca P. Arnold
------------------------------         -------------------------------
    Duly Authorized                        Duly Authorized