On April 12, 2019, Governor Cuomo signed into law the New York Fiscal Year 2020 Budget, which included an amendment retroactively extending the three-year “clawback” provisions of Section 954(a)(3) of the New York Tax Law to certain taxable gifts made by New York residents within three (3) years of death up through the new expiration date of January 1, 2026 (the “three-year clawback”).
The three-year clawback had previously expired on January 1, 2019, and, by its terms, was to no longer apply to New Yorkers who previously made gifts and subsequently died after December 31, 2018, meaning that gifts that were made within three years of a resident’s death that occurred after January 1, 2019 would not have been included as assets for New York estate tax purposes.
How Will the Retroactive Three-Year Clawback Impact New York Residents?
The Federal exemption for estate and gift tax under the 2017 Tax Reform Act was significantly increased to a current rate of $11,400,000 per person, or $22,800,000 per married couple. For New York purposes, there is currently no gift tax, and the estate tax exemption amount is currently $5,740,000 per person.
If a New York resident is considering making a large gift, nothing will change in regard to the federal estate tax. By way of example, if a New York resident makes a significant gift, he can still take advantage of the $11,400,000 federal estate and gift tax exemption amount for federal estate tax purposes. For New York purposes, however, the resident must take into account how the lifetime gift could potentially impact him for New York estate tax purposes.
In the case of most New York residents, the pros/cons of making a large gift should be considered in relation to the New York estate tax. In many cases, however, a resident will be no worse for wear if the resident makes the gift, meaning that if the resident dies within three years of making the gift, the value could potentially subject him to New York State estate tax, but if the gift was never made by the resident in the first place, the value would still be included in the resident’s estate. That said, if a resident is older or in poor health, it may be prudent to make large gifts sooner rather than later since the three-year clawback timeline begins when the gift is made. In that case, making a gift earlier could increase the likelihood that the resident will survive beyond the three-year clawback limit and, therefore, the resident would be successful in making a significant reduction in his New York State Estate.