As we wrote here earlier this year, Governor Cuomo proposed to extend the “clawback law,” which had expired on January 1, 2019, in his fiscal year 2020 Executive Budget. As a reminder, the clawback law pulled the value of all taxable gifts made within three years of a New York resident taxpayer’s death back into the New York resident taxpayer’s estate for New York estate tax purposes.
Since that post, the Budget was passed, with the clawback law extended to January 1, 2026.
With this extension, we have two planning items to note:
First, even with the extension, the gifting environment remains quite favorable for taxpayers. As we wrote here, taxpayers can still “lock in” the increased federal estate and gift tax exemption by making large lifetime gifts now, while the federal exemption is high. The only trick now from a New York estate tax perspective is that the taxpayer still needs to survive three years after making the gifts to avoid New York estate tax on the gifted assets.
Second, the extension places continued emphasis on estate tax allocation provisions. Basically, New Yorkers considering large lifetime gifts should make sure their estate planning documents do not potentially cause one beneficiary to pay New York estate tax on another beneficiary’s gift.
Consider this example:
- Decedent, a New York resident, makes a lifetime gift of $10,000,000 to Beneficiary A.
- Decedent dies the next day with an estate valued at $10,000,000, which she leaves to Beneficiary B.
- Decedent’s estate planning documents have probably the most common estate tax allocation provision, which provides that all estate taxes are to be paid out of the residuary estate, i.e., in this case, by Beneficiary B.
- From a New York perspective, the amount subject to New York estate tax is $20,000,000. Even though the Decedent only owned $10,000,000 in assets at the time of her death, the $10,000,000 lifetime gift is “clawed” back into Decedent’s New York estate because Decedent died within three years of making the gift.
- With this estate tax allocation provision, Beneficiary B pays New York estate tax not only on his gift of $10,000,000 but also on Decedent’s lifetime gift of $10,000,000 to Beneficiary A. The amount of the additional tax: $1,599,800!
The result above could be avoided by adapting the estate tax allocation provision to provide that any New York estate tax attributable to a lifetime gift should be allocated to the recipient of the lifetime gift. In fact, it would make sense to condition the gift to Beneficiary A on A’s paying the New York tax, if applicable.