The New York Estate Tax Cliff: How the 105% Rule Works and How to Avoid It

A New York estate of $7,350,000 pays no estate tax in 2026. An estate of $7,717,500 pays about $735,000. This page explains why, who is exposed, and the planning steps that keep a family on the right side of the line.

Most tax systems are progressive: earn or own a little more, pay a little more. The New York estate tax is not. Under Tax Law § 952, the credit that shelters the first $7,350,000 of a 2026 estate is phased out over a narrow band and then disappears completely. Once the taxable estate exceeds 105% of the exclusion, the entire estate is taxed from the first dollar, at graduated rates that reach 16%. The result is a tax curve with a vertical wall in it, which is why New York practitioners call it the cliff.

The cliff is not a problem for the very wealthy, who are over it regardless and simply pay the graduated rates. It is a problem for families who are close to the line: a couple in Great Neck or Park Slope with a paid-off house, two retirement accounts and a term life policy. For them, the difference between good planning and no planning is often the entire New York tax bill. Below we walk through the mechanism, the numbers and the fixes we use.

How the 105% rule works

New York does not exempt the first $7,350,000 and tax the rest. It computes the tax on the whole taxable estate using the rate table, then grants a credit equal to the tax on the basic exclusion amount. For a taxable estate at or below $7,350,000, the credit wipes out the tax entirely.

Between 100% and 105% of the exclusion, which for 2026 means between $7,350,000 and $7,717,500, the credit is reduced rapidly as the estate grows. At $7,717,500 the credit is zero. Above that figure there is no credit at all, and the estate pays tax on every dollar, including the first $7,350,000 that a smaller estate would have kept tax-free. Nothing about the rate table itself changes; what changes is that the shelter is gone.

The cliff in numbers

The following figures are for a New York resident dying in 2026 and use the current rate table and exclusion.

Read the first two rows together. Adding roughly $367,500 of assets to a $7,350,000 estate produces about $735,000 of tax. The heirs of the $7,717,500 estate receive less than the heirs of the $7,350,000 estate. Beyond the cliff, the tax keeps growing, but at ordinary bracket rates: from $8,000,000 to $10,000,000 the tax rises from about $773,200 to about $1,067,600, which is a marginal cost in the mid-teens, not near 200%. Our New York estate tax cliff calculator lets you see where your own estate falls.

Why the marginal rate approaches 200%

Inside the phase-out band, every additional dollar of estate does two things: it is taxed at its own bracket rate, and it strips away part of the credit that was sheltering the dollars below it. The second effect dwarfs the first. Across the band, the estate grows by roughly $367,500 and the tax grows by roughly $735,000, so each extra dollar costs the heirs about two dollars. That is what “marginal rate approaching 200%” means in practice.

The practical consequence is that a family in the band is better off giving the excess away, to children or to charity, than keeping it. A gift of the amount above $7,350,000 to a child (more than three years before death) or to a charity (at death, by a properly drafted bequest) leaves the heirs with more, not less. The techniques below are ways to do exactly that without giving up more than necessary.

Who is at risk

The people the cliff catches almost never think of themselves as having an estate tax problem. Their wealth is in things they do not count. In our practice the typical profile looks like this:

• Long Island, Westchester and New York City homeowners. A house or co-op bought decades ago is often the largest single asset, and it is included at full market value, not at what was paid for it.
• Owners of life insurance. A term or whole life policy is included at its full death benefit if you owned it or could change the beneficiary (IRC § 2042). A $1,000,000 policy is $1,000,000 of estate, even though it is worth nothing to you while you are alive.
• Retirement account holders. IRAs and 401(k)s are included at gross value. The income tax the beneficiary will pay on withdrawals is not subtracted.
• Surviving spouses who inherited everything outright. New York has no portability. When the first spouse leaves everything to the second, the first spouse's $7,350,000 exclusion is lost and the survivor's estate now contains both halves of the family's wealth.
• People who avoided probate. A revocable living trust, joint accounts and beneficiary designations keep assets out of Surrogate's Court. They do nothing for the estate tax; every one of those assets is in the gross estate.

Seven ways to plan around the cliff

Each of these techniques either removes assets from the New York taxable estate or restructures the estate so that the amount above the exclusion passes tax-free. Most clients use two or three of them together.

1. Lifetime gifts made more than three years before death

New York has no gift tax, so a gift that leaves the estate is simply gone. The exception is the three-year add-back (Tax Law § 954(a)(3)): taxable gifts made by a resident within three years of death are pulled back into the New York estate for decedents dying before January 1, 2032. Gifts above $19,000 per recipient ($38,000 for a couple that splits gifts) must be reported on a federal Form 709, but with a federal lifetime exclusion of $15,000,000 no federal tax is actually paid. The lesson is to start early. We explain the add-back in detail at New York has no gift tax, but that is not the whole story.

2. Annual exclusion gifts

Gifts of up to $19,000 per recipient per year, or $38,000 for a married couple that elects gift-splitting, are not taxable gifts, are not reported, and are not added back even if made the week before death. Direct payments of tuition and medical bills (IRC § 2503(e)) are unlimited on top of that. A couple with several children, their spouses and grandchildren can move a substantial six-figure sum every year and steadily pay the estate down below the exclusion. See how annual gifts save estate tax.

3. The “Santa Clause” conditional charitable bequest

New York does not honor the federal-style fix for the cliff, so we draft one into the will. A Santa Clause leaves to charity the portion of the estate above the point where the New York tax begins, but only if doing so leaves the other beneficiaries with more than they would receive after tax. If the estate is $7,717,500, the amount above $7,350,000 goes to a charity the client chooses, the taxable estate is $7,350,000, the New York tax is zero, and the heirs keep $7,350,000 instead of $7,717,500 minus about $735,000 of tax. If the estate comes in under the exclusion, the clause never operates.

4. A credit shelter trust for married couples

Because New York has no portability, a married couple should use both exclusions. At the first death, up to $7,350,000 passes into a credit shelter trust for the survivor's benefit rather than outright. The survivor can receive income and principal for support, but the trust is not in the survivor's estate at the second death. A couple with combined assets modestly above $7,350,000 can often eliminate the New York tax entirely this way. Our A/B trust page works through the numbers.

5. An irrevocable life insurance trust

An ILIT owns the policy so that the death benefit is never in the estate. For families in the band, insurance is frequently the single asset that pushes them over, and it is the easiest one to remove. A new policy should be bought by the trust from the start; an existing policy transferred to the trust is pulled back into the estate if the insured dies within three years (IRC § 2035). Premiums are funded with annual exclusion gifts using Crummey withdrawal powers.

6. Changing domicile

New York taxes nonresidents only on real property and tangible personal property located in New York. A client who genuinely moves to a state without an estate tax, and who puts any remaining New York real estate into an LLC (which converts it into an intangible), can remove the New York tax altogether. New York audits domicile changes closely, so the move has to be real: home, time, driver's license, voting, doctors, and the rest. Gifts made while the client is not a New York resident are also outside the three-year add-back.

7. The state-only QTIP election

When no federal Form 706 is required, New York allows the executor to make a QTIP election on Form ET-706 alone. This lets a couple leave the amount above $7,350,000 to a QTIP trust for the survivor, defer the New York tax to the second death, and still use the federal exclusion in whatever way suits the family. It is the fix for older wills whose formula clauses would otherwise overfund the credit shelter trust with the $15,000,000 federal amount and trigger New York tax at the first death.

Pitfalls we see

• Waiting too long. The three-year add-back and the three-year rule for life insurance both punish deathbed planning. A plan started at 70 is worth far more than the same plan started at 85.
• Gifting the wrong asset. A gift carries over the donor's income tax basis (IRC § 1015); an inheritance is stepped up to date-of-death value (IRC § 1014). Giving away a low-basis brownstone to save New York estate tax at up to 16% can cost the children capital gains tax at 23.8% federally, and roughly 38.5% combined for a New York City resident, when they sell. Give cash and high-basis assets; keep the appreciated ones. See our page on tax basis.
• Keeping strings attached. If you give away an asset but keep the right to use it or control it, IRC § 2036 pulls it back into the estate. A gift of the house while you continue to live in it rent-free is the classic example.
• Forgetting the federal return. No New York gift tax return exists, but the federal Form 709 is still due for gifts above the annual exclusion. Filing it with adequate disclosure also starts the three-year statute of limitations on the gift's value.
• Relying on a living trust. A revocable trust avoids probate and does nothing for the cliff.

Who does not need to worry about the cliff

If your total estate, counting your home at market value, your retirement accounts at gross value and your life insurance at face value, is comfortably below $7,350,000 and not likely to grow past it, the cliff is not your problem, and we will tell you so. If your estate is well above $7,717,500, the cliff is behind you; you pay graduated rates on everything, and the planning question becomes how much of the estate to move out through the advanced techniques we use for larger estates, such as SLATs, GRATs and family LLCs. The cliff is specifically a problem for estates in the range of roughly $7,000,000 to $10,000,000, and for those families it is usually solvable.

Related Estate Tax Planning Topics

• New York estate tax in 2026 – The full rate table, how the gross estate is computed, and Form ET-706 filing rules.
• A/B trust: credit shelter and marital trust – How a married couple uses both New York exclusions instead of one.
• Irrevocable life insurance trust – Removing the death benefit that pushes so many families over the cliff.
• Spousal lifetime access trust – A completed gift to a trust for your spouse that keeps the assets available to the family.
• Form 709: when to file a gift tax return – The federal return that determines which gifts New York adds back.

Find out where you stand

If you are anywhere near $7,350,000, we will run your numbers, tell you whether the cliff applies to you, and lay out the one or two steps that get you clear of it. Call us at 212-233-1233 or email [email protected]. We serve clients throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Nassau, Suffolk and Westchester.