The purpose of this study was to examine the course and predictors of functional decline among patients with vascular dementia (VaD). Twenty-eight VaD patients completed three tests of executive functions and underwent MRI scanning to generate quantitative ratings of subcortical neuropathology at a baseline evaluation. The caregiver-rated Lawton and Brody Activities of Daily Living Questionnaire was used to estimate instrumental activities of daily living (IADLs) at the baseline evaluation and at a 1 year follow-up. We hypothesized that: (a) IADLs would decline significantly over the course of 1 year, and (b) baseline performance on executive tasks and subcortical neuropathology would predict IADL impairment at 1 year follow-up, even after accounting for global cognitive dysfunction. A paired samples t-test demonstrated that IADLs declined significantly over the course of 1 year, and regression analyses revealed that baseline performance on executive tasks was a significant predictor of IADLs at the 1 year follow-up, even after accounting for global cognitive dysfunction. Contrary to our expectation, subcortical neuropathology did not explain unique variance in IADLs after accounting for executive dysfunction. These findings demonstrate that baseline executive dysfunction is a significant and powerful predictor of future functional decline in individuals with VaD.