One great solution is to establish a donor advised fund at the Community Foundation for Palm Beach and Martin Counties with a gift of the full increased exclusion amount.
Now is the time to plan for the potential sunsetting of the Lifetime Gift and Estate Tax Exclusion. Under the Tax Cuts and Jobs Act in 2020, the lifetime gift and estate exclusion went from $5 million to $10 million (adjusted for inflation, it will be $11.58 million for individuals and $23.16 million for a couple). This provision will sunset and return to $5 million (or $6.8 million adjusted for inflation) on December 31, 2025. However, the sunset provision could accelerate with potential changes in Washington.
A pressing concern has been the consequences of making large lifetime gifts under the increased exclusion with death occurring after the exclusion reverts to lower levels. Commonly called a “claw back,” the IRS has guided taxpayers and their advisors so that they can make informed tax decisions.
For donors who make gifts qualifying for the full exclusion amount by 2025, and die after the exclusion sunsets in 2025, their estate will not “claw back” the excess. Therefore, if a donor gifts the full $11.58 million in 2020 and passes away in 2026, he will lock in the benefit of the increased exclusion and be able to use the $11.58 million exclusion instead of the $5 million exclusion (adjusted for inflation).
Donors who make a gift during life for an amount that is more than the exclusion available at death, but not for the full increased exclusion amount, will receive a partial benefit. For example, suppose an individual makes a $7 million gift in 2020 and dies after 2025 when the exclusion has reverted to $5 million (adjusted for inflation). In that case, she will get the benefit of the exclusion of $7 million, but not the full $10 million (adjusted for inflation.)
Donors may have a very short window to take advantage of this increased exclusion amount if new leadership in Washington sunsets it early. One great solution is to establish a donor advised fund at the Community Foundation for Palm Beach and Martin Counties with a gift of the full increased exclusion amount. Your gift will lock in the higher exclusion and allow you to support your favorite charities over time with grantmaking from your fund.