Saving & Investing
What is portability and what does it mean for me?
October 16, 2013
Gary Gamma: Well then, the next question comes from Laura in Greenwich, Connecticut. "With the portability election, is it still necessary to keep $5.2 million of assets separately in each spouse's name?" Alisa?
Alisa Shin: So, let's take one step back to explain maybe what portability is. Maybe many of our clients aren't familiar with it. Portability is a new tool that Congress gave estate planners in their toolbox to help clients with their estate planning.
What portability says is that should one spouse pass away without using all of their federal estate tax exemption, the executor of that spouse's estate could elect to give the surviving spouse the unused exemption of their deceased spouse. So let me kind of boil it down to numbers.
If we have a husband who passes away and only has $2 million worth of assets in their name, meaning that they have $3.25 million of estate tax exemption remaining—the difference with $5.25 million and $2—the executor could give that $3.25 million through an election that's made on the estate tax return to the surviving spouse. And then the surviving spouse now has an estate tax exemption of $8.5 million, if I'm doing my math right.
So it's a great tool because it's a save for a lot of our clients that we didn't have in the past. Because, in the past, if those clients hadn't done proper planning or didn't consult with an attorney, or didn't follow legal advice, or got bad legal advice, and wasn't able to use the first spouse's full exemption completely at that person's death, the family just lost the unused amount.
Portability now allows families to be able to take fully advantage of the entire amount. That's how it works. There's a lot of details to it, but that's generally how it works.
But to answer the question, I'm afraid that my answer is it depends. It depends on what your goals are, it depends on who you want to give the money to, and it also depends on what you think you might want to do on a personal level after your spouse passes away.
So let's take the first one. It depends on what your goals are. If you're trying to do generational tax planning to shelter money from future taxation as it passes from generation to generation, you don't want to rely on portability because portability only applies to the estate tax exemption. It does not apply to the generation-skipping tax exemption, so you would lose that.
The second thing to consider is, portability is based on you only get the unused exemption of your last spouse. So if you were married to husband one and you got his $3.25 million exemption, and then you remarried, and then you survive that husband, you technically lose—not technically, you do lose—your first husband's $3.25 million. It doesn't matter whether or not the second husband used up his entire exemption, gave you his exemption, or didn't give you his exemption, you'll lose your first spouse's exemption.
So, unless you want tax laws to essentially social engineer your life, you really, we really suggest to clients as a default rule to still stick to traditional planning just to keep your options open in terms of generational tax planning, in terms of what you want to do with your personal life.
And the other part also is, is that while portability was made permanent with this ATRA in January of this year, we don't know if it's permanent forever or if it can ever be taken away. So I think it's just a good idea to be more on the conservative side and do the right planning upfront so that things go exactly the way you want to go, regardless of order of death, regardless of if you marry again or not.
Gary Gamma: Kevin, let me get you in here. There's also a follow-up question I think that might apply. It says, "Does the portability feature only apply to a spouse?"
Kevin Wick: It does. And it applies to a spouse and one of the other sort of recent changes that we'll get to, I think, in some of our further discussion, is same-sex spouses. And so, now, with the guidance, U.S. Supreme Court decision in June, and guidance that's come from the IRS since then, basically, the same treatment that traditional spouses would receive under the federal tax laws is going to be extended to same-sex couples when they've been married in a state that recognizes that union.
And so, absolutely. It does apply to spouses, although we have sort of a wider cast, cast a wider net of spouses, if you will, than we would have say a year ago.
All investments are subject to risk, including the possible loss of the money you invest.
Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved.
Estate executors now have some new tools to use
Recent direction from Congress now enables an executor to allocate unused exemptions to surviving spouses. Vanguard financial planner Kevin Wick runs the numbers and explains how portability works.
Other excerpts from this webcast:
- All investments are subject to risk, including the possible loss of the money you invest.
- Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.
- This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
© 2013 The Vanguard Group, Inc. All rights reserved.