Gift taxes are a financial obligation imposed on a person’s right to transfer property to another person without receiving fair market value in return. Giving someone a gift that exceeds a specific value may require a person to have to pay taxes. New York state does not require residents to pay a gift tax at the state level, however, there are federal gift taxes and other limitations, such as the implications of the Estate Tax Exemption Sunset, that you must be aware of when trying to give assets to beneficiaries in New York. Understanding these rules is crucial for avoiding estate taxes and preventing your gifts from incurring unexpected tax liabilities.
Working with a qualified Long Island estate planning attorney may help make sure that you are following legal requirements to avoid costly penalties. At Schlessel Law, PLLC, our team of legal professionals, led by top-rated attorney Seth Schlessel, leverages their extensive knowledge of the law to assist Long Island residents in protecting their assets while adhering to the law. To learn more, contact us today at (516) 574-9630 to schedule a consultation.
New York Gift Tax
In the state of New York, there is no direct gift tax imposed. This means that New York taxpayers have the freedom to bestow gifts upon beneficiaries during their lifetime without the worry of a New York-specific gift tax.
However, it is important to note that the state employs a provision that indirectly imposes a “de facto” gift tax. Under this provision, the value of any gifts made within three years prior to the taxpayer’s death is included in the calculation of the New York estate tax. Essentially, if a donor does not survive for at least three years from the date of a gift, the value of that gift could be subject to New York estate tax upon their death.
This three-year look-back provision creates a critical timing consideration for gift planning, as it requires the donor to survive long enough to ensure that the value of the gift does not contribute to the New York estate tax calculation.
Remember, while there is no New York gift tax, the Federal government does impose a gift tax on transfers made during a person’s lifetime. Therefore, when planning your gift-giving, it’s always prudent to consult with a Long Island estate planning lawyer to understand the full implications at both the state and federal levels. In this way, you can ensure your assets are distributed in the most tax-efficient manner possible.
Gift Tax Exclusions and Lifetime Exemptions in New York
The gift tax is imposed on any transfer of property in which the person receiving the assets or property does so without receiving cash or equivalent value in exchange.
Even though New York does not require residents to pay a gift tax on assets and property given away to beneficiaries, the federal government does impose the tax on gifts once they exceed a specific amount. This amount is determined annually and can increase depending on the economy but only at increments of $1,000. For 2023, the amount was $17,000; for 2024, the annual federal gift tax exemption is $18,000.
When giving away amounts, only the amount above the annual exclusion is taxed. For example, you can give a sibling $20,000 and the taxable amount would be $2,000 above the $18,000 exclusion. The exclusion amount applies for the whole year, meaning the amount you give away doesn’t have to be a lump sum. If you give away $2,000 a month for the tax year, you will only be taxed for the $6,000 above the $18,000. You will have to file a gift tax return for the amount that is above the annual exclusion.
Gifting above the annual exclusion doesn’t make you automatically liable to pay taxes. There is also a lifetime gift and estate exemption that applies to each taxpayer. The lifetime exemption limit for 2024 has been raised to $13.61 million from $12.92 million in 2023. In the example above, you can file a gift tax return for the taxable amount and you will still not have any taxes due because of the lifetime exemption.
If a person exceeds the annual exclusion, they would need to file a Form 706 and report the gift to the IRS. However, if you and your spouse are both US citizens, you can enjoy an unlimited marital exemption and would not have to worry about the annual exclusion amount. You may also be able to utilize the combined exemption if you and your spouse would like to give away assets you own together, referred to as gift splitting. You and your spouse can give away up to $36,000 as is the exemption for 2024. This applies to same-sex couples who are legally married but not to registered domestic partners or civil union partners.
If your spouse is not an American citizen, you would have to file a gift tax return individually. A citizen spouse can give a non-US citizen spouse up to $185,000 in 2024. Anything above that amount would be considered taxable under the gift tax exclusion.
While most Americans wouldn’t have to deal with the federal gift tax, it is not overly difficult to calculate for those who do have to pay them. Gift tax rates are calculated using margins with the maximum rate reaching 40%. Only those who exceed the lifetime gift and estate exemptions will have to pay the gift tax.
For example, if a person wants to give $50,000 after depleting their lifetime exemption, their gift will be taxed along the following margins.
| Federal Gift Tax Rates | |
| Taxable Amount Above Annual Exclusion | Applicable Gift Tax Rate |
| $0 – $10,000 | 18% |
| Above $10,000 but below $20,000 | 20% |
| Above $20,000 but below $40,000 | 22% |
| Above $40,000 but below $60,000 | 24% |
| Above $60,000 but below $80,000 | 26% |
| Above $80,000 but below $100,000 | 28% |
| Above $100,000 but below $150,000 | 30% |
| Above $150,000 but below $250,000 | 32% |
| Above $250,000 but below $500,000 | 34% |
| Above $500,000 but below $750,000 | 37% |
| Above $750,000 but below $1,000,000 | 39% |
| $1,000,000+ | 40% |
The breakdown for the calculation on the taxes would be as follows:
- $10,000 – 18% = $1,800
- $10,000 – 20% = $2,000
- $20,000 – 22% = $4,400
- $10,000 – 24% = $2,400
The total gift tax imposed on the $50,000 gift would be $10,600.
There are notable exceptions to the gift tax rule. Not all gifts are subject to the gift tax and payments made for medical expenses, educational expenses, and donations to political or charitable organizations will not be subject to the gift tax. The gift tax would also not apply to gifts made to spouses who are also US citizens.
If you are unsure whether your gift would be subject to taxes, consulting with an experienced financial advisor or an estate planning attorney can help ensure that you are aware of your tax obligations. Having the help of a lawyer who is well-versed in tax law and how the exemptions work will help you avoid costly mistakes down the line.
Maximum Tax-Free Gift
New York does not currently impose a gift tax, allowing individuals to strategically gift their assets to reduce potential estate tax liabilities. However, it’s essential to be aware of certain rules and limitations.
In the year 2023, the annual federal gift tax exemption stands at $17,000 per recipient. However, in 2024, this limit rises to $18,000. This provision allows individuals the opportunity to provide gifts of up to $18,000 to each recipient, which can include children, nieces, or grandchildren, free from any tax implications or the requirement to file a gift tax return.
Each taxpayer is provided with a lifetime gift and estate exemption, allowing them to make gifts up to a specified limit without incurring tax. If the annual limit is surpassed when giving to an individual in a single year, the excess amount will be subtracted from the taxpayer’s lifetime exemption. As of 2024, this lifetime exemption stands at $13.61 million, marking an increase from the $12.92 million threshold in 2023. It’s important to note that surpassing the annual exclusion for gifts does not automatically result in tax liability.
Explore the possibilities of maximizing tax-free gifts and securing your financial legacy with assistance from a Long Island estate planning attorney. At Schlessel Law PLLC, our skilled attorneys can guide you through the intricacies of estate planning, enabling you to make well-informed decisions tailored to your individual circumstances. Contact us today for comprehensive and tax-efficient estate planning services.
The New York 3-Year Clawback Rule
The state of New York does not impose a gift tax, however, it does have a 3-year clawback rule for estate tax purposes.
When a person passes away, the state will include the last three years of gifts the person gave away from their estate and include the gifts for the last three years in the calculation for the person’s estate taxes. If a person gave away $1,000,000 two years before they passed away, the amount will be included in the overall computation of their estate for estate taxes.
It is important to note that the lifetime exemption for gift and estate taxes would also apply to the amount calculated under the 3-year clawback rule. If the person has not exceeded the lifetime extension throughout their life and the value of their estate isn’t likely to reach the $13.61 million exemption, they would not have to pay any estate taxes on the federal level.
New York does have an estate tax at the state level. In 2023, estates valued at less than $6.58 million were not subject to estate taxes, and in 2024, the limit was raised to $6.94 million. Just like the gift tax, the estate tax in New York also applies in margins. However, high-net-worth New Yorkers should be aware of the New York estate tax cliff.
Preparing for Estate and Gift Tax Exemption Sunset
The estate and gift tax exemption, which has allowed many to transfer substantial wealth without incurring federal taxes, is set to decrease significantly after 2025. Currently, individuals can gift up to $13.61 million tax-free over their lifetime, but this cap is expected to drop to around $7 million in 2026. This upcoming reduction is due to the expiration of provisions from the Tax Cuts and Jobs Act of 2017.
This change means that the window for making large, tax-free gifts to heirs is closing soon. For those looking to maximize their gifting potential and minimize future estate taxes, action should be taken now while the higher limits remain in effect. Reviewing your estate plan with a Long Island estate planning attorney is advisable to effectively navigate these upcoming changes. A thorough assessment of your assets, liabilities, and future needs is essential to making informed decisions about gifting within the current legal framework and aligning your estate plan with your goals.
One immediate strategy could be to utilize the current high exemption limits before they decrease. This approach might involve making larger gifts now, rather than risking the reduced capacity to transfer wealth tax-free in the future. Additionally, exploring options like trusts, particularly irrevocable trusts or spousal lifetime access trusts (SLATs), could offer strategic benefits. These tools can provide continued control over distributed assets and potentially protect them from future tax liabilities.
This period offers a unique opportunity to transfer wealth efficiently. Proactively adjusting your estate strategy can help maintain the intended benefits for your heirs, avoiding a rushed approach as the exemption deadline approaches.
New York Estate Tax Cliff
While estates valued at less than $6.94 million would not be subject to the estate tax due to the exemption, estates exceeding the exemption by more than 5% or estates valued at more than $7,287,000 (as of 2024) are entirely taxable.
Only those falling under the 5% margin would have their estate taxed on the excess above the $6.94 million exemption. For example, if a person’s estate is worth $6.99 million, the taxable estate would only be $50,000. If the estate is valued at $7.75 million, the whole estate would be considered taxable.
If a person would try to utilize the lifetime exemption to lessen their taxable estate when it comes to estate taxes, availing of this method would require the person to outlive their gift by three years to avoid it being subjected to the clawback rule.
For couples in New York who can avail of the estate tax exclusion for spouses, the amount that would pass on to the surviving spouse would still be subject to estate taxes at the time of the second spouse’s death and their beneficiaries would be receiving an amount that is significantly less due to the cliff.
This may require the establishment of a credit shelter trust which would only apply to married couples whose estate would likely fall off the tax “cliff”. When a spouse passes away, their estate plan will direct an amount equal to the New York estate tax exemption ($6.94 million in 2024). Any amount above the exemption can either pass through another trust or directly to their beneficiaries.
This allows the surviving spouse and the deceased spouse’s beneficiaries to access the assets but will not subject them to estate taxes when the surviving spouse eventually passes away as the assets would belong to the trust and not directly owned by the surviving spouse. If your spouse is not a US citizen, a different method may be applicable for you. An experienced trusts attorney can shed more light on whether a credit shelter trust would be helpful in your situation.
It is also viable to donate the assets to be able to get your estate’s value below the threshold. However, this should only be done with the help of an experienced attorney who is knowledgeable about the laws and other options available.
If you think that you will fall off of the estate tax “cliff”, it is important to seek the help of an experienced estate planning attorney who would be able to help you explore your options for reducing your tax obligations. High-net-worth individuals are at significant risk of losing a sizable amount of their assets and property when they pass away due to New York’s estate tax rules.
Seth Schlessel, a skilled Long Island estate planning and trusts attorney, has dedicated his practice to helping families ensure that their hard-earned assets are protected. At Schlessel Law, PLLC, our team of estate planning attorneys can create tailored plans that address each client’s individual needs and estate planning goals. Contact us today at (516) 574-9630 to learn more about our estate planning and trusts services.
How an Estate Planning Attorney Can Help
Regardless of the size of your estate, planning your taxes is a part of securing your legacy for your loved ones. While most people would not have to worry about exceeding the lifetime exemption, it is still important to safeguard what happens to your estate and ensure that it will be handled and distributed according to your wishes.
There are different estate planning tools available that a qualified estate planning attorney can utilize in optimizing your estate for tax purposes. A significant portion of an estate planning attorney’s job is to help clients understand the impact of existing legislation on their estate and how estate planning tools can be used to respond to this impact.
Depending on your financial situation, your attorney may be able to devise an estate plan that takes into account New York’s laws on exemptions and exclusions and provides you with options that would prevent any adverse impacts on your estate. It is important to remember that even those with existing estate plans would have to update their plans to reflect current legislation and their current milestones in life.
Getting the help of a qualified Long Island estate planning attorney can help you reduce the hassle and skillfully navigate the legal processes involved in securing your estate. At Schlessel Law, PLLC, top-rated estate planning attorney Seth Schlessel and his team of legal professionals provide quality estate planning services. Our team diligently works to provide a tailored plan that accommodates our clients’ needs and financial situation with the aim of fulfilling their estate planning goals. We may be able to assist you in planning your estate to protect your assets and avoid being subjected to hefty estate taxes.
To learn more about how we can help you, contact us today at (516) 574-9630.
