On March 31, 2014, broad changes were made to the New York estate and gift tax laws.  In addition to increasing the New York basic exclusion amount for taxable estates, a New York estate tax “cliff” was introduced that phases out the New York basic exclusion amount for taxable estates between 100% and 105% of the exclusion amount.  As a result, taxable estates that exceed 105% of the New York basic exclusion amount will lose the benefits of the exclusion entirely.

In 2019, the New York basic exclusion for taxable estates is $5,740,000 per person.  In addition, as of January 1, 2019, taxable gifts made within three (3) years of death are no longer included in a New York decedent’s estate for estate tax purposes.  The combination “cliff” and elimination of the three-year look back has created a valuable gifting opportunity available to New Yorkers.

Below is a chart indicating various New York taxable estates, the amount of New York State estate tax due, the amount that would ultimately pass to beneficiaries, the total benefit from gifting, and the generated savings (i.e. the amount that would be saved in taxes that exceeds the amount that would be gifted).

New York State Taxable Estate New York State
Estate Tax
Applicable Credit Total Passing to Bene-ficiaries Without Gifting Amount Gifted Total Passing to Bene-ficiaries With Gifting Total Benefit from Gifting Generated Savings
(Savings From Taxes Less Gift)
$5,740,000 $0 $479,600 $5,740,000 $0 $5,740,000 $0 $0
$5,740,100 $219 $479,393 $5,739,881 $100 $5,740,100 $219 $119
$5,750,000 $25,170 $455,630 $5,724,830 $10,000 $5,750,000 $25,170 $15,170
$5,800,000 $146,746 $340,054 $5,653,254 $60,000 $5,800,000 $146,746 $86,746
$5,850,000 $259,774 $233,026 $5,590,226 $110,000 $5,850,000 $259,774 $149,774
$5,900,000 $356,804 $141,996 $5,543,196 $160,000 $5,900,000 $356,804 $196,804
$5,950,000 $434,397 $70,403 $5,515,603 $210,000 $5,950,000 $434,397 $224,397
$6,000,000 $493,493 $17,307 $5,506,507 $260,000 $6,000,000 $493,493 $233,493
$6,001,960 $495,709 $15,326 $5,506,251 $261,960 $6,001,960 $495,709 $233,749
$6,027,000 $514,040 $0 $5,512,960 $287,000 $6,027,000 $514,040 $227,040
$6,100,000 $522,800 $0 $5,577,200 $360,000 $6,100,000 $522,800 $162,800
$6,150,000 $529,200 $0 $5,620,800 $410,000 $6,150,000 $529,200 $119,200
$6,200,000 $535,600 $0 $5,664,400 $460,000 $6,200,000 $535,600 $75,600
$6,250,000 $542,000 $0 $5,708,000 $510,000 $6,250,000 $542,000 $32,000
$6,286,697 $546,697 $0 $5,740,000 $546,697 $6,286,697 $546,697 $0
$6,300,000 $548,400 $0 $5,751,600 $560,000 $6,300,000 $548,400 $0
$6,400,000 $561,200 $0 $5,838,800 $660,000 $6,400,000 $561,200 $0
$6,500,000 $574,000 $0 $5,926,000 $760,000 $6,500,000 $574,000 $0
$6,600,000 $586,800 $0 $6,013,200 $860,000 $6,600,000 $586,800 $0
$6,700,000 $599,600 $0 $6,100,400 $960,000 $6,700,000 $599,600 $0
$6,800,000 $612,400 $0 $6,187,600 $1,060,000 $6,800,000 $612,400 $0
$6,900,000 $625,200 $0 $6,274,800 $1,160,000 $6,900,000 $625,200 $0
$7,000,000 $638,000 $0 $6,362,000 $1,260,000 $7,000,000 $638,000 $0
$7,500,000 $705,200 $0 $6,794,800 $1,760,000 $7,500,000 $705,200 $0
$8,000,000 $773,200 $0 $7,226,800 $2,260,000 $8,000,000 $773,200 $0
$8,500,000 $844,400 $0 $7,655,600 $2,760,000 $8,500,000 $844,400 $0
$9,000,000 $916,400 $0 $8,083,600 $3,260,000 $9,000,000 $916,400 $0
$9,500,000 $991,600 $0 $8,508,400 $3,760,000 $9,500,000 $991,600 $0
$10,000,000 $1,067,600 $0 $8,932,400 $4,260,000 $10,000,000 $1,067,600 $0

As detailed in the above chart, the beneficiaries of a New York decedent in 2019 with a taxable estate of $5,740,100 would actually receive less in assets than if the decedent died with an estate of $5,740,000. If such decedent had gifted $100 the day before he/she died, his/her beneficiaries would have received an additional $119 in assets.  The total benefit in this case would therefore be $219 (which equals the estate tax that would have been due to New York State on his/her death).  These potential savings increase exponentially as the taxable estate increases.  In fact, a New York decedent in 2019 with a $6,001,960 taxable estate could save $495,709 by gifting $261,960 the day before he/she died.  The result is a realization of $233,749 in generated savings.

Lifetime gifting, as described above, not only permanently removes such gifted assets from the donor’s taxable estate without any loss to the ultimate amount inherited by his/her beneficiaries, but also eliminates the future appreciation on such gifted assets from the donor’s taxable estate.  With the 2019 federal estate exemption of $11,400,000 ($22,800,000 for married couples), many New Yorkers could take advantage of this gifting opportunity.

The gifting described above works best when done with cash or cash equivalents.  Using highly appreciated assets for such gifting may offset any gains achieved from such gifting as a result of the loss of a stepped-up cost basis in such assets on the donor’s death.  Individuals should always consult with a tax professional prior to any lifetime gifting to ensure that such gifting would not result in adverse gift or income tax consequences.

Note: On January 15, 2019, Gov. Andrew Cuomo released his proposed 2019 Executive Budget which would revise the New York Tax Law to reinstate the three-year look back for taxable gifts made within three (3) years of death in a New York decedent’s estate for estate tax purposes for gifts made before December 31, 2025.

Clients occasionally come to us because their community would like to raise funds on behalf of their child with special needs.  It is important that a proper special needs trust is set up before these gifts are made so that assets are not inadvertently given to the special needs child individually.  A friend or family member of the special needs person can set up a third party special needs trust for the benefit of the special needs person, and those donating can write checks to the name of the special needs trust.  If this trust is structured properly, the funds donated can be used for the benefit of the special needs person but will not disqualify him or her from government benefits.

These types of donations are typically not tax deductible to the donor because the money is only being used for a particular person or family.  It is important to let the donors know that their donations are not tax deductible but instead, will be treated as a gift to the trust. 

The special needs trust could be structured to qualify for the annual exclusion gift, which would allow donors to give up to $13,000 each year to each trust beneficiary, without using any of his or her lifetime gift tax exemptions.  The special needs beneficiary cannot be a beneficiary for purposes of this $13,000, so other family members would need to be beneficiaries of the trust, as well, in order to take advantage of the annual exclusion.  This should be disclosed to the donors so that they understand both the tax and personal aspects of their donations to the trust. 

The special needs person could be the sole beneficiary of the trust if this is more desirable, but all donations to the trust will use part of the donor’s lifetime gift tax exemption, which is currently $5.12 million.