A client recently came to our Manhattan office wanting to give her daughter a significant sum for a down payment on a Brooklyn apartment. She saw it as a simple act of love. From a family perspective, it was. From a legal and financial perspective, that one gift could trigger consequences involving federal taxes, capital gains, and future long-term care eligibility. Her situation highlights a critical truth: generosity requires a plan.
The Federal Gift Tax Framework
The federal government sets two thresholds for gifting. The first is the annual gift tax exclusion. For 2024, you can give up to $18,000 to any individual without filing a gift tax return. A married couple can combine their exclusions to give $36,000 to one person, tax-free.
Giving more than the annual exclusion does not mean you owe tax. It means you must file a gift tax return—Form 709. The amount above the annual exclusion simply counts against your lifetime gift and estate tax exemption. In 2024, that lifetime exemption is $13.61 million per person. You only pay federal gift tax if your total lifetime gifts exceed this amount. For most families, the issue is not paying the tax, but the legal requirement to report the gift and properly manage that lifetime exemption.
New York Estate Tax and Lifetime Gifts
This is where federal and state law diverge. New York has no separate gift tax. This leads many to believe they can give away unlimited assets during their lifetime to avoid New York estate tax. For now, that is largely correct.
New York previously had a three-year “clawback” rule that added certain large gifts back into an estate for tax calculation. That rule, under a prior version of New York Tax Law, was eliminated for individuals dying after January 1, 2019. This change makes lifetime gifting a powerful strategy to reduce a New York taxable estate. However, this strategy must be weighed against other serious financial consequences.
The Hidden Cost: Capital Gains and Cost Basis
Taxes are not the only factor. When you gift an asset—like stock or real estate—the recipient also receives your original cost basis. If they sell the asset, they will owe capital gains tax on the appreciation since the day you first acquired it.
Contrast this with inheritance. When an heir receives an asset through a will or trust, its cost basis is “stepped up” to its fair market value at the time of death. A subsequent sale often results in little to no capital gains tax. I have seen a well-intentioned gift of appreciated stock cost a child tens of thousands in taxes—a liability completely avoided if the stock had passed through the estate as provided under the Estates, Powers and Trusts Law (EPTL). This is about the stewardship of generational wealth.
Medicaid and the Five-Year Look-Back
We must also plan for the contingency of long-term care. If you need Medicaid to cover nursing home costs, the government performs a five-year “look-back” at your financial records. Any assets you gave away during that period can trigger a penalty, rendering you ineligible for benefits for a period of time.
A gift made today to help a grandchild with college could prevent you from qualifying for essential care four years from now. This is a reality that must inform any prudent plan for gifting assets. The desire to provide for your family today cannot come at the expense of your own security tomorrow.
A deliberate approach to gifting ensures your generosity achieves its purpose without creating unintended burdens. The strategy must be intentional. A prudent first step is to inventory your assets and their original cost basis to determine which are best suited for lifetime gifting versus inheritance. We often begin this process with a “legacy audit” to align your financial actions with your family’s long-term goals.
