New York Retroactively Reinstates Gift Clawback Rule

April 2019

The New York Fiscal Year 2020 Budget signed into law by Governor Andrew Cuomo on Friday, April 12, 2019, provides that, for a New York resident who dies between January 16, 2019 and December 31, 2025, taxable lifetime gifts made within three years of death will be included in computing the resident’s New York taxable estate. This “clawback” rule changes the existing law which excluded such gifts for residents dying after January 1, 2019 and reinstates the rule that was in effect for the prior several years.

New Yorkers are able to make larger gifts without a current gift tax liability due to the increase in the federal gift and estate tax exemption (currently, $11,400,000 per person, or $22,800,000 for spouses splitting a gift). As the current federal exemption (adjusted for inflation) is scheduled to continue through 2025, some people have not felt a need to take immediate advantage of the exemption. However, the reinstatement of the clawback regime should further incentivize a New York resident to make gifts as soon as possible to maximize the probability of surviving such gifts by three years and avoiding inclusion of the gifts in the resident’s New York taxable estate.

Even if the resident dies within three years and the clawback is applied to a gift, the estate tax liability will not exceed what it would have been had such gift not been made. In addition, all appreciation on the gifted property after the date of the gift will not be subject to estate tax at the resident’s death. This is particularly important for a resident whose taxable estate hovers near the New York estate tax exemption amount (currently $5,740,000) and may be subject to the estate tax “cliff,” which would subject the entire estate to New York estate tax if the taxable estate exceeds the exemption amount by more than 5%.

Tremendous tax savings opportunities are currently available due to historically high state and federal exemption amounts. The ever-shifting political climate and the tax proposals advocated recently by some presidential candidates highlight how ephemeral the current tax laws, including the federal exemption amounts, may be.

To determine how the current tax regime applies to you, please contact one of the members of our Trusts and Estates Department listed below.

Katy H. Donlan at +1 212 592 1522 or [email protected]
Ariel Nelson at +1 212 592 5946 or [email protected]

© 2019 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.