Schlessel Law PLLC

Overview of New York State Gift Tax

Navigating the intersection of federal and NYS gift tax laws is complex, requiring careful consideration and planning for those who wish to transfer significant wealth. A knowledgeable estate and tax planning attorney can help individuals and families develop strategies that mitigate the impact of NYS gift tax on their overall legacy.

The NYS gift tax is imposed on the transfer of assets at death that have a value in excess of certain thresholds. The tax is levied on the estate itself rather than on individual beneficiaries and there are various exemptions and thresholds to protect smaller estates from NYS gift tax liability.

In addition, the law allows individuals to make gifts during their lifetimes of up to $15,000 per recipient each year without incurring NYS gift tax. Married couples can double that amount to $23,000 per recipient each year. The NYS gift tax does not apply to gifts made to a charitable organization.

Lifetime gifting is an effective strategy to reduce the size of a persons taxable estate and may also lower their federal gift tax obligations. For those with large taxable estates, leveraging assets in the form of gifting can allow them to take advantage of the current unified credit exemption of $11.8 million in 2024 and preserve more of their legacy for loved ones.

However, its important for New York residents to be aware that the state has a 3-year lookback rule that will tie taxable gifts back into their gross estate for purposes of New York State death tax. This makes it particularly important for New Yorkers to consider making taxable gifts prior to April 1 to minimize their potential state death tax liability.

To avoid the risk of a three-year clawback, heirs of gifted assets must receive “consideration in money or its worth” in exchange for the assets. The gift tax law defines “consideration in money or its worth” as the fair market value of the property plus any additional benefits (such as income, appreciation, or depreciation) or services received by the heirs in connection with the asset.

Given the current soaring inflation-related federal exclusion amounts, significant leveraged gifting opportunities exist for those with large taxable estates. The key is to work with an experienced estate planning lawyer who can develop strategies that will minimize both state and federal gift and estate tax liabilities. 

Steps to Comply with New York State Gift Tax

The interplay of federal and state estate taxes can present high-net-worth individuals and families with complex challenges. These individuals need to understand how NYS gift tax and estate tax laws work and can benefit from collaborating with an experienced team of professionals, including attorneys and financial advisors, to develop tailored strategies that mitigate tax exposure and maximize wealth transfers.

NYS gift tax and estate tax is based on a threshold, not an exemption amount, yielding a sizable tax cliff if an estate value exceeds the threshold. As such, there is a strong incentive to pursue estate planning strategies that reduce the estate’s value below the threshold.

Lifetime gifting can be a powerful tool in accomplishing this goal. Using the annual NYS gift tax exclusion ($18,000 per person, per recipient, in 2024) coupled with leveraged gifts of low-basis assets such as real estate and private equity can help to substantially reduce one’s taxable estate. It is also important to note that the unused portion of the unified credit can be carried over from year to year for up to five additional years.

Another way to achieve a lower taxable estate is to transfer the bulk of your wealth to charitable organizations while alive, with the remainder passing to family members on a non-taxable basis. This is a powerful strategy that can have far-reaching benefits, particularly in today’s volatile markets and uncertain economic future. Understanding how the NYS gift tax applies to such transfers can help in maximizing the efficiency of this strategy.

In addition to pursuing gifting strategies, it is critical to review your estate plan on a regular basis. This will enable you to ensure that the structure and provisions of your trust are consistent with current tax law and reflect your wishes. Further, it is important to take into account the possibility that certain assets may have appreciated in value over time. If these assets are sold, capital gains taxes will be payable. To avoid such taxes, it is often beneficial to transfer these assets into a completed gift non-grantor trust (ING) or incomplete gift non-grantor trust (IGNT). Being mindful of the NYS gift tax rules during these transfers can prevent unexpected tax liabilities.

Regularly reviewing your estate plan not only helps in staying compliant with current laws but also in adapting to changes in the NYS gift tax regulations. As estate laws evolve, keeping your plan updated ensures that your wealth is distributed according to your wishes and in the most tax-efficient manner possible. 

Lawyer Support for New York State Gift Tax Matters

In addition to navigating the complex federal estate and NYS gift tax system, high-net-worth individuals and families face a unique set of state laws that impact their ability to transfer wealth during life which is NYS gift tax or at death (estate tax). Navigating the intersection of these two systems requires careful consideration and thoughtful planning.

NYS gift tax law on the taxability of gifts and transfers of property at death is particularly complex. It is based on the principle that property left at death is taxed by the state in which the decedent was domiciled at the time of his or her death, and in which the decedent's taxable estate is determined.

The New York estate tax is a progressive tax with a starting point of 3.06 percent and a top rate of 16 percent. The amount that is exempt from the estate tax at the time of death is determined by adding together the decedent's personal and real property, minus any liabilities, debts, or liens.

While there are strategies to minimize the size of an individual's taxable estate, many of these techniques have significant downsides. For example, transferring assets during life to family members could reduce the size of the taxable estate but also could result in NYS gift tax and use up the unified credit, which allows individuals to transfer up to $18,000 per recipient each year.

In this case, a decedent named four adult daughters as beneficiaries of her net gift agreement. The daughters agreed to assume and pay any federal or state estate or NYS gift tax imposed on her, provided that she had died within three years of the date of the net gift agreement.

The court ruled that since the necklace was in New York at the time of the decedent's death and was not removed from the State after that date, it constituted tangible personal property within the meaning of the State's power to tax gifts under Article 249-x of the Tax Law. This decision suggests that New York should consider adopting legislation defining its power to tax tangible personal property as it applies to the same type of personalty as the Federal estate and NYS gift tax provisions in Section 2104 of the Internal Revenue Code. 

Schlessel Law PLLC

Schlessel Law PLLC | Long Island Elder Law Attorney

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

(516) 574-9630