Many of my clients assume that giving money or property away before they die is the easiest way to shrink a taxable estate and keep assets out of Surrogate's Court entirely. In New York, that assumption can backfire, and I have seen families receive unwelcome news from their accountant only after the fact.
Under New York Tax Law Section 954(a)(3), certain taxable gifts made within three years of a resident's death are pulled back into that person's New York gross estate, even though the gift was completed and the property was already out of the giver's hands. This rule, often called the "clawback," was recently extended and now applies to estates of decedents who pass away before January 1, 2032. The purpose is straightforward: New York does not want residents avoiding the state estate tax simply by giving assets away shortly before death. Gifts that qualify for the federal annual exclusion, currently $19,000 per recipient, are generally not subject to this addback, which is why I often recommend that clients favor smaller, regular annual gifts over one large transfer made late in life.
New York's estate tax exemption is $7,350,000 for 2026, but the state uses a "cliff": once an estate's value exceeds 105% of that exemption, the entire estate becomes taxable, not just the amount over the threshold. That is why I advise clients with estates approaching this range to begin gifting well in advance, giving the three-year clock time to run before any health crisis makes the timing a concern. A gift made five years before death permanently reduces the taxable estate. The same gift made eighteen months before death may accomplish nothing at all for New York estate tax purposes.
Even when a gift falls outside the three-year window, gifting during life is not automatically the better move. Assets transferred at death generally receive a step-up in income tax basis to fair market value, while assets given away during life carry over the donor's original, often much lower, basis. I have seen children sell a gifted property and face a substantial capital gains bill that a modest amount of additional patience could have avoided entirely. As we discussed in a prior article on revocable living trusts, avoiding Surrogate's Court is only one piece of a sound estate plan, and it should never come at the expense of the tax consequences that follow.
Lifetime gifting remains a valuable tool, but only when it is timed and structured correctly.
If your loved one left behind lifetime gifts which need to be reviewed for New York estate tax purposes, contact us today at (347) 766-2685 for a free phone consultation.
Contributed by Dan Rose, a local business writer specializing in estate and gift tax planning services in New York City.
