New York Tax Law § 954(a)(3) currently includes in a decedent’s gross estate any gifts made within three years of death. This pulls the value of those gifts into the New York gross estate, subjecting them to New York's estate tax, even though they were completed inter vivos transfers and excluded from the federal gross estate. This clawback tax is currently set to sunset on January 1, 2026.
§ 954. Resident's New York gross estate.
(a) General. The New York gross estate of a deceased resident means his or her federal gross estate as defined in the internal revenue code (whether or not a federal estate tax return is required to be filed) modified as follows:
. . .
(3) Increased by the amount of any taxable gift under section 2503 of the internal revenue code not otherwise included in the decedent's federal gross estate, made during the three year period ending on the decedent's date of death, but not including any gift made: (A) when the decedent was not a resident of New York state; or (B) before April first, two thousand fourteen; or (C) between January first, two thousand nineteen and January fifteenth, two thousand nineteen; or (D) that is real or tangible personal property having an actual situs outside New York state at the time the gift was made. Provided, however that this paragraph shall not apply to the estate of a decedent dying on or after January first, two thousand twenty-six.
Why the Rule Exists: New York enacted the clawback provision in 2014 to close a loophole that allowed wealthy residents to avoid state estate tax by transferring assets shortly before death. By adding certain gifts back into the gross estate, the statute discourages last-minute gifting strategies designed solely to minimize estate tax liability.
Proposed Change Under S.3009-B
The New York State Senate’s One-House Budget Bill (S.3009-B) proposes a significant amendment to § 954(a)(3). The amendment does three things:
- Eliminates the sunset clause, making the clawback tax permanent;
- Recharacterizes the resulting tax as an “obligation of the decedent,” which attempts to qualify it as a deductible expense under IRC § 2053;
- Quietly removes the tax from the apportionment framework, effectively shifting the entire burden to the residuary estate.
Here is the full legislative revision:
(3) Increased by the amount of any taxable gift under section 2503 of the internal revenue code not otherwise included in the decedent's federal gross estate, made during the three-year period ending on the decedent's date of death, but not including any gift made: (A) when the decedent was not a resident of New York state; or (B) before April first, two thousand fourteen; or (C) between January first, two thousand nineteen and January fifteenth, two thousand nineteen; or (D) that is real or tangible personal property having an actual situs outside New York state at the time the gift was made. Provided, however, that this paragraph shall not apply to the estate of a decedent dying on or after January first, two thousand twenty-six. The amount by which the total tax imposed under this article exceeds the total tax that would have been imposed under this article if this paragraph did not apply shall be treated as an obligation of the decedent as of the decedent’s death that is subject to the provisions of this article (but which shall not be deductible for purposes of this article).
This change would be effective immediately.
Making the Clawback Tax Permanent
New York repealed its standalone gift tax in 2000. When estate tax reform resurfaced years later, the 2013 New York State Tax Reform and Fairness Commission recommended reinstating a gift tax to prevent wealthy individuals from avoiding estate tax through deathbed gifting.
Instead of reviving the gift tax, the Legislature took a different path. As part of the 2014 overhaul, it enacted an “addback” provision—codified in Tax Law § 954(a)(3)—which increases the New York gross estate by "any taxable gift under section 2503 of the Internal Revenue Code not otherwise included in the decedent's federal gross estate" made within three years of death. This ensures that certain inter vivos transfers are effectively treated like testamentary transfers for New York estate tax purposes, even though they are not included in the federal gross estate.
At the time, the addback was scheduled to expire—and its sunset has been extended more than once. Most recently, in 2019, the Legislature extended it until January 1, 2026—a date chosen to coincide with the scheduled sunset of the federal estate and gift tax exemption provisions enacted by the Tax Cuts and Jobs Act of 2017 (TCJA).
Under the TCJA, the federal estate tax exemption was temporarily doubled through the end of 2025. During that period, wealthy New Yorkers could make large deathbed gifts that avoided New York estate tax (because New York had no gift tax) without triggering federal gift tax (thanks to the expanded exemption).
To prevent this, New York extended its clawback rule in 2019 but added a sunset date of January 1, 2026—the same date the federal exemption is scheduled to revert to pre-2018 levels. The idea was that once the federal and New York exemption thresholds realigned, the incentive for such deathbed gifting would vanish, making the clawback provision unnecessary.
But Governor Hochul’s FY 2026 Executive Budget proposes to make the clawback permanent. Why? Because there is no guarantee that the federal exemption will in fact revert. Congress may choose to extend or even raise the higher exemption, creating a renewed incentive to shift wealth late in life.
Here’s how the Executive Budget explains the change:
Make Permanent the Estate Tax Three-Year Gift Addback Rule. To prevent the granting of deathbed gifts to take advantage of the difference between the Federal and State exemption threshold level, while at the same time reducing one’s otherwise taxable New York estate, the three-year gift addback rule was previously extended until January 1, 2026, which is the date the two thresholds are set to coincide, eliminating the incentive for deathbed gifts. The Executive Budget makes permanent the three-year gift add-back rule to ensure there is no future concern over potential revenue losses in the event that the higher Federal estate tax threshold level is extended or increased at a later time.
In short, the sunset was originally enacted to match the anticipated drop in the federal exemption. But with future federal policy uncertain, New York is now proposing to eliminate the sunset entirely—locking in the clawback tax as a permanent feature of its estate tax system.
Treating the Tax as an Obligation of the Decedent
The proposed amendment states that the extra tax created by clawback should be treated as an "obligation of the decedent." This language echoes a proposal made in 2016 by the New York City Bar Association's Committee on Estate and Gift Taxation.
Their 2016 report noted that if the addback tax were not classified as a debt of the decedent, it might be considered a non-deductible tax liability under IRC § 2058:
It is questionable whether the addback would be deductible for federal estate tax purposes under IRC § 2058, which applies to “state death taxes”. To be deductible under IRC § 2058, the “state death tax” must be paid “in respect of any property included in the gross estate....” N.Y. Tax Law § 954(a)(3), however, only applies if the taxable gift is not otherwise included in the decedent’s federal gross estate. Therefore, the addback provision may subject the property added back to the full maximum 16% New York estate tax rate, without any offsetting federal estate tax deduction.
In that memo, the Committee suggested that the clawback-related tax be treated as a debt of the decedent to improve the chances of a federal deduction under IRC § 2053. Recharacterizing it as a debt was a strategic move to help estates deduct it federally (footnote omitted):
One approach to address this issue would be to amend N.Y. Tax Law § 954(a)(3) to treat the New York estate tax attributable to the addback amount as a debt of the decedent that came into existence immediately prior to the decedent’s death, subject in all respects to Section 13-1.3 of the EPTL (except as otherwise provided in the decedent’s deed of gift, Will or other governing instrument). As a result of this treatment as a debt, the estate tax apportionment provisions set forth in EPTL § 2-1.8 would not apply to the estate tax attributable to the taxable gift addback. The statutory treatment of the addback as a debt should be respected for federal estate tax purposes. See Commissioner v. Estate of Bosch, 387 U.S. 456 (1967).
The foregoing objective could be accomplished by amending N.Y. Tax Law § 954(a)(3) to add the following two concluding sentences to N.Y. Tax Law § 954(a)(3):
Except as may otherwise be provided in the deed of gift, Will or other governing instrument by specific reference to the addition to the New York gross estate attributable to this subsection (a)(3), any addition to the New York estate tax attributable to this subsection (a)(3) (the “Transfer Tax Debt Amount”) shall be treated as a debt of the decedent (a) that came into existence immediately prior to the decedent’s death, (b) that is subject in all respects to § 13-1.3 of the New York Estates, Powers and Trusts Law, and (c) that shall not be subject to apportionment under § 2-1.8 of the New York Estates, Powers and Trusts Law. Except as may otherwise be provided in the deed of gift, Will or other governing instrument by specific reference to the addition to the New York gross estate attributable to this subsection (a)(3), the Transfer Tax Debt Amount shall equal the amount by which the total tax imposed under this article exceeds the total tax that would have been imposed under this article if this subsection (a)(3) did not apply.
However, while the NYCBA’s 2016 proposal made this framework explicit and included language allowing testators to opt out through their governing instruments, the current legislative proposal includes no such clarifying language or flexibility.
Stealth Inequitable Change: Removing the Ability to Apportion the Tax
Currently, estate taxes in New York are generally apportioned under EPTL 2-1.8, which reflects an effort to avoid burdening the residuary estate unfairly. By reclassifying the clawback tax as a “debt of the decedent,” the proposed change moves it outside the reach of EPTL 2-1.8 and into the debt regime of EPTL 13-1.3.
This effectively shifts the entire burden of the clawback tax to the residuary estate, unless a governing instrument provides otherwise. Yet the proposed amendment does not mention apportionment or EPTL 13-1.3 at all. The shift is both significant and silent.
Unlike the NYCBA’s 2016 proposal, which addressed this issue head-on, the current legislative language buries the shift in legal effect. It also does not allow taxpayers to opt out of the recharacterization, as the 2016 NYCBA proposal did. These omissions may lead fiduciaries, beneficiaries, and courts to overlook the change entirely—until it becomes a point of conflict in administration or litigation.
What Is Certain
- The clawback tax will become permanent if the proposed amendment passes.
- The recharacterization attempts to make the tax deductible federally by treating it as a debt under IRC § 2053 rather than a state death tax under § 2058.
- The proposal tacitly removes recharacterized amounts from apportionment under EPTL 2-1.8, making them deductible under EPTL 13-1.3.
Questions Remain
- Will the IRS accept New York’s recharacterization? If not, then taxpayers will face a permanent clawback with no deduction and increased litigation risk. See my forthcoming post, NY Proposal Tries to Make Clawback Tax Deductible—But Will the IRS Agree?, which examines whether this recharacterization actually results in deductibility under federal law.
- Will lawmakers or practitioners recognize the apportionment shift? The change is not identified in the bill summary or the proposed statute.
- Can estate planners draft around it? The 2016 NYCBA proposal allowed testators to override the default treatment in their wills or deeds of gift. The current proposal includes no such language.
Further Reading
- NY Senate Bill S.3009-B (2025).
- Memorandum Concerning Certain Aspects of the 2014-2015 New York State Executive Budget Dated January 20, 2014, NYCBA, March 2014 (available here).
- Report of the Estate and Gift Taxation Committee and the Trusts, Estates and Surrogate’s Courts Committee Setting Forth Proposals to Reform the New York State Estate Tax, NYCBA, March 2016 (available here).
- Business Council’s Testimony Helped Shape Proposed NYTL § 954(a)(3) Amendment, Wills, Trusts, Estates, March 31, 2025.
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Hani Sarji
New York lawyer who cares about people, is fascinated by technology, and is writing his next book, Estate of Confusion: New York.
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