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Estate Planning Considerations in Light of Reinstated NYS Estate Tax Clawback

By Cheryl Prout, on September 13th, 2019

On April 12, 2019, Governor Andrew Cuomo reinstated New York State’s estate tax clawback provision that had previously expired on January 1, 2019. The budget bill retroactively extended the three-year clawback provisions to certain taxable gifts made by New York (NY) residents within three years of death through December 31, 2025.

What does this mean?

The reinstatement results in residents including taxable gifts in a taxable estate for any gifts made within three years of the date of death.

NY’s estate tax exclusion for 2019 is $5.74 million. But, there’s one caveat: if your NY taxable estate is between 100 and 105 percent of the exclusion, the exclusion begins to phase-out. If your taxable estate exceeds 105 percent of the exclusion, you lose the benefit of the exclusion entirely (known as the “New York estate tax cliff”).

Prior to 2018, the tax exclusion had been historically in line with the federal gift, estate and GST exclusions. But in 2018, the federal gift, estate, and GST exclusions were increased, and in 2019, the amount of these federal exclusions reached $11,400,000 per person ($22,800,000 for married couples). This increase expires on January 1, 2026, so wealthy individuals should strive to take advantage of the increased federal exclusion before it’s set to sunset in 2025 (or possibly sooner if the law changes).

Understanding lifetime gifts

One of the benefits of making lifetime gifts is that you can permanently remove those assets from your NY taxable estate (provided you survive the gift by three years). But, wealthy residents could still be subject to estate taxes due to the spread between the federal and NY State estate exclusions.

For example, let’s say “Tom” died in 2019 with a $7 million taxable estate after gifting $4.4 million of his estate during his lifetime. If this were the case, he would not be subject to a federal estate tax because his federal taxable estate at death plus the taxable gifts made during his lifetime did not exceed his federal estate exclusion of $11.4 million. However, for estate tax purposes, the entire $7 million taxable estate would be subject to NY estate taxes because his taxable estate exceeds 105 percent of the NY exclusion. Additionally, if Tom did not survive the gift by three-years, his NY taxable estate would also include $4.4 million of taxable gifts made during his lifetime. In that case, the clawback provision would significantly increase Tom’s NY estate tax liability. The sooner Tom makes the gifts, the higher the likelihood that Tom would survive the clawback period.

Leveraging the increased federal gift amount

For a taxpayer to take advantage of the increased dollar amount of federal gift, estate, and GST exclusions, or to avoid the NY estate and gift tax clawback provision, sufficient planning needs to take place to protect the taxpayer and their beneficiaries from future federal or NY estate and transfer taxes.

There are numerous planning strategies a taxpayer can pursue to protect their estate for years to come, but proper consultation with your CPA, attorney and financial advisor is a must. For further information or to schedule a consultation of your estate planning strategies, please contact Cheryl Prout or another member of our Bonadio Estate & Trust expert team.

This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.

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Written By

Cheryl Prout June 21 2021 07 21 201921

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