To Our Clients and Friends:
In 2014 New York enacted estate tax legislation which added back to the taxable estate the value of certain gifts made by a New York resident if the gifts were made within three years of his or her death. The law applied only to estates of New York residents dying on or before December 31, 2018, and only with respect to gifts made between April 1, 2014 and December 31, 2018. The 2014 legislation expired on December 31, 2018. However, the 2020 NY Executive Budget reenacted the three year add back rule so that it applies to New York taxpayers dying after January 15, 2019 and prior to January 1, 2026.
The following is an example of how the three year add back rule operates:
Consider Bob, an unmarried New York resident with an estate of $10 million, who makes a gift on April 1, 2019 of $5 million to his son, Jon.
The gift is not subject to federal gift tax because Bob can utilize the $11.4 million federal gift and estate tax exemption. After the gift, Bob has $6.4 million of federal gift and estate tax exemption remaining that he can apply against future gifts during his life or bequests upon his death. The gift is not subject to New York gift tax because New York does not levy a gift tax.
After the gift, Bob’s estate is worth $5 million. Bob dies unexpectedly on December 1, 2019 leaving the remaining $5 million to his son, Jon. On its face, it appears Bob did smart estate planning; his remaining $5 million estate is not subject to federal estate tax (which applies at a top rate of 40%) because Bob’s estate can apply his remaining $6.4 million federal gift and estate tax exemption, and his estate is also not subject to New York estate tax (which applies at a top rate of 16%) because Bob can apply his $5.74 million New York estate tax exemption. However, the foregoing does not take into account the New York three year add back rule.
Since Bob was a New York resident when he died, and since the gift was made within three years of his death, the $5 million gift is brought back into his New York taxable estate, increasing the value of his estate for New York estate tax purposes to $10 million. Since this $10 million exceeds Bob’s $5.74 million New York estate tax exemption, Bob’s entire estate is subject to New York estate tax. And to add insult to injury, New York does not merely tax the difference between Bob’s $10 million estate and the $5.74 million New York estate tax exemption, it taxes the entire $10 million estate – this is referred to as New York’s estate tax cliff because, once the value of the estate exceeds the New York estate tax exemption by 5%, the entire value of the estate becomes subject to New York estate tax, not just the amount over the New York estate tax exemption. The result of the extension of the three year add back rule is that Bob’s estate becomes subject to a roughly $1 million New York estate tax as opposed to being subject to no New York estate tax. It is as if no gift had been made at all when death occurs within three years of the gift.
In the above example, the estate tax consequences are the same whether or not Bob made the gift. However, to the extent Bob’s estate was also subject to federal estate tax, the add back of the gift for New York estate tax purposes could have caused an increase in the federal estate tax due.
Does the New York three year add back rule mean that gifts should not be made? Of course not. However, the New York add back rule is a factor for New York residents to consider when making substantial gifts.
The takeaway is that if you are a New York resident and are considering making significant gifts, you should consider the potential impact of the three year add back rule (and that is especially true if your life expectancy is less than three years). Please call your primary contact at Golenbock Eiseman Assor Bell & Peskoe or a member of our Trusts & Estates department with any questions.
– By Daniel Axman
Donald Hamburg: 212.907.7380
Email: [email protected]
Steven Chill: 212.907.7350
Email: [email protected]
Daniel Axman: 212.907.7379
Email: [email protected]
Golenbock Eiseman Assor Bell & Peskoe LLP uses Client Alerts to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Alert should not be construed or relied upon as legal advice. This Client Alert may be considered advertising under applicable state laws.
© GEABP (2019)
