Schlessel Law PLLC

Key Facts About New York State Gift Tax

In the United States, most individuals are able to give an unlimited amount of money or property to gift recipients during their lifetime without being subject to federal taxation. However, at the state level, things are different. New York, for example, has an estate and inheritance tax with a top rate of 16 percent, which includes specific provisions for the NYS gift tax.

Most state taxes on transfers of wealth have similar structures: Only estates and bequest amounts above a certain threshold are taxed, with a sizeable exemption or credit that reduces the effective rate. In most cases, the size of a state's exemption is comparable to that of the federal estate tax. However, several states have exemption amounts significantly higher than the federal exemption amount. In these situations, the potential for double taxation, including implications of the NYS gift tax, can be significant.

In addition, the majority of states also impose state income taxes. As a result, many individuals with substantial wealth have multiple state taxation concerns to consider, such as the interplay between income tax and the NYS gift tax.

To address these concerns, many families choose to move assets to trusts that can be located in states with no state income taxes. This allows the grantor to remain taxable on the income generated by the trust assets while retaining enough control over the trust to avoid being deemed a "gift" for federal estate and gift tax purposes. However, the NYS gift tax rules must be carefully considered to ensure compliance and optimize tax outcomes.

Unfortunately, a recent case by the Tax Court of the Fifth Circuit has made it more difficult for these trusts to avoid being taxable. In McCord v. Commissioner, the court ruled that a contingent reversionary interest can be considered a gift only if it is deemed to be "reasonably ascertainable in value."

This ruling was significant because it meant that an estate's Sec. 2035(b) tax liability could be deducted from its gross estate - even though this amount was not known at the time of death. This created a double tax on the same asset, making it more costly to transfer wealth from one generation to the next. It also emphasized the need to understand the NYS gift tax implications in estate planning.

However, a recent legislative change has altered the situation. The governor recently passed legislation that will require any taxable gifts made by a decedent within three years of death to be included in the decedent's taxable estate. This add-back rule will be phased in over the next five years until it is at parity with the federal exclusion amount and estate tax rates. This new rule highlights the importance of considering NYS gift tax when making estate plans.

While this change has not yet taken effect, it may provide a powerful incentive for individuals to make large gifts while they are alive. In conjunction with soaring inflation-related federal estate tax exemption amounts, this will allow individuals to leverage their gifting opportunities significantly. 

Managing Gift Tax in New York State

Most states have some form of estate or inheritance taxes, with the general idea being to punish large transfers of wealth and encourage smaller ones. To help offset the costs of this taxation, many have exemptions of varying sizes and types. The size and nature of the exemptions vary from state to state, with some providing an absolute exemption while others provide a threshold below which the amounts of the estate or bequest will be taxed and then tax only those values that are above this amount. New York, for example, offers a relatively high exemption but then imposes a tax on the entire value of estates that exceed it. This creates an incentive to minimize the amount of assets passing through to heirs and to seek planning techniques that can accomplish this goal, including strategies related to the NYS gift tax.

The annual per donee gift tax exclusion has been increased for 2024 to $18,000 and will be indexed in future years. Gifts of tuition and medical expenses paid directly to educational institutions, medical providers, and insurance companies remain exempt from gift and estate tax. These exclusions are also relevant when considering the NYS gift tax implications.

However, one major exception to this rule is that if an individual makes a gift of property worth more than the annual exclusion limit, the amount in excess of the exclusion will be subject to tax at a rate of 18%. To avoid this, individuals should be careful when purchasing real estate or making gifts of other real property that will exceed the annual exclusion limit, keeping in mind the NYS gift tax rules.

In addition, when establishing trusts to receive gifted assets, individuals should be aware of the fact that if beneficiaries are given certain limited rights over the gifted property (commonly known as "Crummey withdrawal powers"), the annual exclusion cannot be used to make these gifts. This is because the trust will be considered taxable under Section 2035(b) of the Internal Revenue Code. To reduce this risk, a nonresident individual should consider seeking the assistance of an experienced estate planner to establish trusts that do not contain Crummey withdrawal powers, ensuring compliance with both federal and NYS gift tax regulations.

Another important consideration for nonresidents is a potential change in domicile that could trigger a New York estate tax liability. In an effort to discourage people from claiming that they have changed their domicile to avoid paying this tax, auditors are instructed to carefully examine the size, value, and use of each residence and to look for evidence of a change in domicile such as bank statements, phone and email records, and contracts with real estate brokers. Understanding how domicile affects the NYS gift tax can be crucial in estate planning.

Finally, a key difference between federal and New York estate and gift tax law is that New York does not recognize portability, which allows spouses to aggregate their unused federal estate and gift tax exemptions upon death. As a result, it is critical for married couples to utilize estate planning strategies that can maximize the use of their federal exemptions. A knowledgeable attorney can help with this process by recommending appropriate trust structures and by reviewing the estate plan to identify any changes that may be necessary, taking into account the nuances of the NYS gift tax. 

How Attorneys Help with New York State Gift Tax

For many high-net-worth individuals and families, gift tax and estate taxes are significant considerations in planning their estates. Navigating the intersection of New York State and federal gift and estate taxes requires careful planning and a thorough understanding of the laws that govern both, including the implications of the NYS gift tax.

As most New Yorkers know, the state imposes a gift tax on transfers that occur both during life and upon death. For this reason, it is important to plan your transfer of wealth both during your lifetime and at death, so that you can limit the amount that is taxable. For this reason, high-net-worth individuals and families often work closely with estate planning professionals to develop strategies that can mitigate tax exposure, taking into account the NYS gift tax.

One of the most common techniques to lower your taxable estate is to gift assets to loved ones during your lifetime. There are several ways to do this, including setting up a trust and using that trust to make multiple gifts to your children or others. Another popular strategy is to give a substantial amount to charity or charities of your choice during your lifetime. This can be done either as a gift to an unrestricted charity or by making a bequest to the charities in your will and testament. These strategies can help manage the impact of the NYS gift tax on your estate.

A key consideration in making lifetime gifts is to ensure that you do not exceed the New York gift tax exemption, which is currently $6.94 million per individual. In addition, it is important to understand the three-year lookback rule that applies to gifts made in the three years before your death. This is sometimes referred to as the clawback rule, and it can be a trap for the unwary. It is important to review your gift-giving habits on a regular basis to ensure that you do not exceed the exemption in any year, keeping the NYS gift tax rules in mind.

Similarly, if you are considering moving your domicile to New York in order to qualify for Medicaid coverage in the future, it is important to be aware of the new rules concerning residency audits. These audits are designed to determine whether a taxpayer has complied with the rules in Section 2-1.8 of the New York Estates, Powers, and Trusts Law, which require that any income or value added by a taxable gift be apportioned to all persons who are interested in the decedent's gross tax estate. This is another area where the NYS gift tax becomes relevant.

The auditors are instructed to examine the size, value, and location of each residence, as well as the amount of time spent in each home. They also look at the number and type of "employees" (domestic help, groundskeepers, drivers, etc.) employed at each home and whether the taxpayer maintains a "permanent place of abode" in New York. For this reason, it is extremely important to consult with an attorney if you are thinking about changing your domicile to ensure compliance with NYS gift tax regulations.

Understanding the intricacies of the NYS gift tax, along with federal tax implications, can help high-net-worth individuals and families better manage their estate planning and minimize their tax burden. Consulting with knowledgeable estate planning professionals is crucial to navigate these complexities effectively. 

Schlessel Law PLLC

Schlessel Law PLLC | Long Island Elder Law Attorney

34 Willis Ave Suite 300, Mineola, NY 11501, United States

(516) 574-9630