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It is important to consider that gifts made within three years of a decedent’s death are “clawed back” into a decedent’s New York taxable estate. This means that even though the asset was not owned by the decedent at death, the gift is included in the value of the estate for the purpose of calculating New York estate tax.
The impact of this “clawback” is compounded by income tax considerations. Unlike assets that pass at death that are included in the decedent’s taxable estate and generally receive a step-up in basis to fair market value as of the decedent’s date of death, gifts retain the donor’s original cost basis even if clawed back into the taxable estate. As a result, there may be estate tax due on the gift plus capital gains tax that may not have been incurred had the gift been owned by the donor at death.
For example, if a highly appreciated asset is gifted shortly before death, it may nevertheless be included in the New York taxable estate due to the clawback and may not receive a step-up in basis resulting in both estate tax and capital gains tax on its subsequent sale.
Given these complexities, thoughtful planning is essential in order to evaluate the timing of gifts, the nature of the assets being transferred, and the overall size of the estate. Coordinating estate and income tax strategies can help mitigate unintended consequences and improve transfer efficiency.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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