The New York Estate Tax Cliff: How Trusts Keep a Million Estate Below the Line

By Albert Goodwin, Esq., Law Offices of Albert Goodwin, New York. Figures updated for tax year 2026. Dollar amounts are indexed each year, so confirm the current basic exclusion amount with the New York Department of Taxation and Finance before acting.

New York taxes estates differently from the federal government and from almost every other state. A New York resident who dies in 2026 with a taxable estate of $7,350,000 owes no New York estate tax. A resident who dies with a taxable estate of $7,717,501 owes roughly $735,000. That jump is the New York estate tax cliff, and it is the reason New Yorkers with estates in the $7 million to $30 million range plan their trusts differently from clients in Florida or Texas.

This page explains how the cliff works under New York Tax Law § 952, which New York rules change the math (the three-year gift add-back, the absence of portability, the absence of a gift tax), and which trust and valuation strategies actually move an estate below the line. For the mechanics of each trust in general terms, see our page on advanced New York estate planning techniques. This page is about the New York tax result.

How the New York estate tax cliff works

New York Tax Law § 952 sets a basic exclusion amount that is indexed for inflation each year. The amount is $7,160,000 for deaths in 2025 and $7,350,000 for deaths in 2026. The tax is imposed on the New York taxable estate at graduated rates that start at 3.06% and reach 16% on amounts over $10,100,000.

The exclusion is delivered as a credit, and the credit disappears quickly. Under § 952(c), if the taxable estate exceeds 105% of the basic exclusion amount, the credit is zero and the entire estate is taxed from the first dollar. For 2026, 105% of $7,350,000 is $7,717,500. Between $7,350,000 and $7,717,500 the credit phases out, so each additional dollar of assets in that band produces more than a dollar of tax.

• Taxable estate of $7,350,000: New York estate tax of $0.
• Taxable estate just over $7,717,500: New York estate tax of about $735,000, computed on the whole estate.
• Taxable estate of $10,000,000: about $1,067,600.
• Taxable estate of $15,000,000: about $1,866,800.
• Taxable estate of $25,000,000: about $3,466,800.

Compare the federal picture. For 2026 the federal basic exclusion amount is $15,000,000 per person, with a 40% rate above it. A single New Yorker with a $12 million estate owes no federal estate tax and about $1.37 million of New York estate tax. For most of our clients in this range, New York is the only estate tax that matters.

Three New York rules that change the planning

1. New York has no gift tax, but it adds back gifts made within three years of death

New York repealed its gift tax in 2000. A New York resident can give away $5 million during life and owe New York nothing on the transfer. The catch is Tax Law § 954(a)(3): taxable gifts made within three years of death are added back to the New York gross estate as if the decedent still owned them. The rule applies to gifts made on or after April 1, 2014 by a person who was a New York resident when the gift was made. The legislature has extended the rule repeatedly and it currently has no scheduled expiration.

Two things are not added back. Gifts of real property or tangible personal property located outside New York are excluded. Gifts that are not "taxable gifts" under Internal Revenue Code § 2503, such as annual exclusion gifts ($19,000 per recipient in 2026) and direct payments of tuition or medical expenses, are also excluded.

The practical consequence: lifetime gifts to an irrevocable trust are the most direct way to get a New York estate below the cliff, but the strategy works only if the donor survives three years. Every gift example on this page carries that caveat.

2. New York does not recognize portability

Under federal law a surviving spouse may elect to use the deceased spouse's unused exclusion (the DSUE amount). New York has no equivalent. If the first spouse to die leaves everything outright to the survivor, the first spouse's $7,350,000 New York exclusion is wasted. For a married couple with $14 million, that single omission can cost the survivor's estate more than $1.8 million in New York tax.

The fix is a credit shelter trust (also called a bypass trust) funded at the first death with assets up to the New York exclusion amount. The surviving spouse can receive income and principal for health, support and maintenance, and the trust assets pass to the children free of estate tax at the second death. Because the federal exclusion is more than double New York's, the trust is usually drafted with a formula clause that funds the New York amount and leaves the balance to the spouse, often through a QTIP trust. New York permits a separate New York QTIP election in some circumstances where no federal return is required, which gives the executor flexibility at the first death.

3. New York follows the federal gross estate, including everything a revocable trust holds

The New York gross estate starts with the federal gross estate under Tax Law § 954. Assets in a revocable living trust are included under Internal Revenue Code § 2038, so a revocable trust does nothing for the cliff. A revocable trust avoids probate; it does not avoid tax. See the benefits of a living trust in New York and what can and cannot go into a revocable trust for what that type of trust does accomplish. Only completed transfers to an irrevocable trust, or valuation discounts, reduce the New York taxable estate.

Trust strategies that move a New York estate below the cliff

Spousal lifetime access trust (SLAT)

A SLAT is an irrevocable trust one spouse creates for the benefit of the other spouse (and usually descendants). The donor spouse gives up ownership, but the household keeps indirect access because the beneficiary spouse can receive distributions.

The gift to a SLAT does not qualify for the marital deduction. That is deliberate. The gift is a taxable gift that uses part of the donor's $15 million federal exclusion, and using that exclusion is the point: the assets, and all future appreciation, leave both spouses' estates. For New York purposes there is no gift tax, so the only exposure is the three-year add-back if the donor dies within three years.

A couple with $14 million who funds a $5 million SLAT and survives three years has cut the donor spouse's exposure below the New York exclusion while keeping the assets available to the family. Couples who want two SLATs must avoid the reciprocal trust doctrine, which lets the IRS and New York treat two mirror-image trusts as if each spouse had created a trust for himself or herself. The trusts need different terms, different trustees or different funding dates.

Intentionally defective grantor trust (IDGT) with an installment sale

An IDGT is an irrevocable trust that is a completed transfer for estate and gift tax purposes but is treated as owned by the grantor for income tax purposes under Internal Revenue Code §§ 671 through 679. The most common trigger is the grantor's power to substitute assets of equivalent value under § 675(4)(C). Because the grantor is the income taxpayer, transactions between the grantor and the trust are disregarded under Revenue Ruling 85-13, and the grantor's payment of the trust's income tax is not an additional gift under Revenue Ruling 2004-64.

The estate-freeze version works like this. The grantor makes a seed gift to the trust, typically 10% of the value to be sold. The grantor then sells appreciating assets to the trust in exchange for a promissory note. The note must bear interest at or above the applicable federal rate (AFR) published monthly by the IRS under § 1274; a note below the AFR is a gift of the foregone interest and defeats the plan. The note's face value stays in the grantor's estate. Growth above the AFR accrues inside the trust, outside the estate.

Illustration (hypothetical, not a client result). A New York resident owns LLC interests appraised at $5 million that are expected to grow 8% a year. She gives $500,000 of interests to an IDGT and sells the remaining $4.5 million for a nine-year interest-only note at an assumed mid-term AFR of 4%, with a balloon payment at maturity. Her estate holds a $4.5 million note instead of $4.5 million of LLC interests. If the interests double over nine years, roughly $4.5 million of growth sits in the trust for her children. The $500,000 seed gift is a taxable gift that New York would add back if she died within three years. The note itself is not a gift and is not added back; it is simply an estate asset at its face value.

Grantor retained annuity trust (GRAT)

A GRAT is governed by Internal Revenue Code § 2702. The grantor transfers assets to the trust and retains a fixed annuity for a term of years. The taxable gift is the value of the remainder, computed using the § 7520 rate for the month of funding. A "zeroed-out" GRAT sets the annuity high enough that the remainder, and therefore the gift, is close to zero. Whatever the assets earn above the § 7520 rate passes to the remainder beneficiaries free of gift and estate tax.

Illustration (hypothetical). A founder funds a two-year GRAT with $1 million of pre-IPO stock when the § 7520 rate is 5%. The annuity needed to zero out the gift is about $538,000 per year. If the stock is worth $3 million at the end of year two, the trust pays the founder two annuity payments (in cash or in kind) and the balance, roughly $1.9 million, passes to the children with essentially no gift tax and no use of exclusion.

Two New York cautions. First, if the grantor dies during the term, the trust assets are pulled back into the federal gross estate under § 2036, and New York follows the federal gross estate, so the GRAT fails for the cliff as well. Short, rolling two-year GRATs limit that risk. Second, the remainder beneficiaries take the grantor's income tax basis under § 1015, so a GRAT trades estate tax savings for a future capital gains bill. For a New York resident facing a 16% marginal estate tax rate plus 40% federal above $15 million, that trade is usually favorable; for an estate that would be below the cliff anyway, it often is not.

Irrevocable life insurance trust (ILIT)

An ILIT owns a life insurance policy on the grantor's life so that the death benefit is excluded from the gross estate under Internal Revenue Code § 2042. The trust must own the policy; if the grantor transfers an existing policy, § 2035 pulls the proceeds back into the estate if the grantor dies within three years of the transfer. A policy purchased by the trustee from the start avoids that rule.

The grantor funds premiums by gifts to the trust, and the trustee gives beneficiaries temporary withdrawal rights (Crummey powers) so that the gifts qualify for the annual exclusion. Annual exclusion gifts are not taxable gifts, so they are not subject to New York's three-year add-back.

Correcting a common misunderstanding: transferring $4 million of income-producing commercial real estate into an ILIT to pay premiums is a $4 million taxable gift. It consumes $4 million of federal exclusion and is added back to the New York estate if the donor dies within three years. The gift may still be sound planning, but it is a gift strategy, not an insurance strategy. The ILIT's own contribution is the death benefit itself, which arrives income-tax free and estate-tax free and is often the only liquid asset available to pay a New York estate tax bill on a family business or Manhattan real estate.

Family limited partnership or LLC: valuation discounts

The cliff is measured by value, and value is what an appraiser can defend. When a parent transfers interests in a family limited partnership or LLC rather than the underlying assets, the transferred interests are non-controlling and have no ready market. Qualified appraisers apply discounts for lack of control and lack of marketability that commonly fall between 20% and 40% combined, depending on the entity's assets, governance terms and distribution history. Fractional interests in real property held as tenants in common receive similar, usually smaller, discounts.

New York follows federal valuation, so a discount recognized on the federal gift tax return reduces the New York taxable estate as well. The rules in Internal Revenue Code § 2704 limit discounts tied to certain lapsing rights and liquidation restrictions, and the IRS challenges entities that lack a business purpose or that the parent continues to treat as a personal checking account; that pattern invites inclusion under § 2036. Report every discounted transfer on a gift tax return with adequate disclosure under § 6501(c)(9) so the statute of limitations begins to run. Gifts of discounted interests are taxable gifts and carry the three-year New York add-back.

Charitable lead and charitable remainder trusts

A charitable remainder trust under Internal Revenue Code § 664 pays the grantor or family members an annuity or unitrust amount for life or a term of up to 20 years, then distributes the remainder to charity. The present value of the charitable remainder must be at least 10% of the initial value. The grantor receives an income tax deduction for the charitable remainder, and the trust can sell appreciated assets without immediate capital gains tax. The assets are removed from the New York estate, and the charitable deduction also applies for New York estate tax purposes.

A charitable lead annuity trust reverses the order: charity receives payments for a term, and the remainder passes to children. The taxable gift is the value of the remainder, which can be reduced toward zero when the § 7520 rate is low. Lead trusts suit New York families who already give significantly and who hold assets expected to outperform the § 7520 rate.

Generation-skipping and dynasty trusts

The federal generation-skipping transfer (GST) tax applies at 40% to transfers to "skip persons," meaning grandchildren or unrelated people more than 37.5 years younger than the transferor, to the extent the transfer exceeds the transferor's GST exemption. The GST exemption equals the basic exclusion amount, $15 million per person in 2026. New York has no GST tax of its own. Allocating GST exemption to a long-term trust lets the assets pass through the children's generation without a second layer of estate tax.

New York still applies the rule against perpetuities in EPTL 9-1.1, so a trust governed by New York law must vest within lives in being plus 21 years. Families who want a trust that lasts for many generations often create it under the law of a state that has abolished the rule, with a trustee located there. Doing so raises New York income tax questions, discussed next.

New York income tax on trusts, and why trust situs matters

Under Tax Law § 605(b)(3), a trust is a New York resident trust if it was created by a New York domiciliary, whether by will or during life. A resident trust ordinarily pays New York income tax on all its income. The trust is an exempt resident trust, and pays no New York income tax on undistributed income, only if three conditions are all met: no trustee is domiciled in New York, no real or tangible personal property of the trust is located in New York, and the trust has no New York source income.

Two anti-avoidance rules narrow that exemption. Tax Law § 612(b)(40) requires a New York resident beneficiary to include accumulated income later distributed from an exempt resident trust (a throwback rule). Tax Law § 612(b)(41) treats an incomplete gift non-grantor trust, the so-called ING trust, as a grantor trust for New York purposes, so the New York grantor pays tax on its income. An out-of-state dynasty trust for a New York family therefore needs an out-of-state trustee, out-of-state assets and careful distribution planning, or the New York income tax savings will not materialize.

Building flexibility into an irrevocable trust

New York law offers two ways to adjust an irrevocable trust after it is signed. EPTL 7-1.9 allows the creator of a trust to amend or revoke it with the written consent of all persons beneficially interested; the limit is that minor and unborn beneficiaries cannot consent, which rules out the statute for most trusts that include grandchildren. EPTL 10-6.6 permits a trustee with discretion to invade principal to "decant" the trust assets into a new trust with different administrative terms, subject to notice to beneficiaries and limits that protect fixed income interests and tax elections. Decanting cannot be used to add beneficiaries or to shift property back to the grantor, and any change must be tested against the estate tax rules so that the trust does not become includible again.

Well-drafted New York irrevocable trusts also name an independent trustee with discretionary distribution powers, give a non-fiduciary the power to remove and replace trustees, and include the grantor's swap power under § 675(4)(C) so that low-basis assets can be pulled back into the estate for a basis step-up shortly before death.

What does not work

• Revocable trusts: fully includible under IRC § 2038. They avoid probate, not tax. See how to avoid probate in New York.
• Self-settled asset protection trusts under New York law: EPTL 7-3.1 makes a trust for the grantor's own benefit void as against the grantor's creditors, and retained beneficial interests generally keep the assets in the estate. New Yorkers who need creditor protection typically look to another state's statute; see our page for asset protection for physicians.
• Deathbed gifts: taxable gifts within three years of death come back into the New York estate under § 954(a)(3). Only annual exclusion gifts and gifts of out-of-state real or tangible property escape the add-back.
• Joint accounts and beneficiary designations: these avoid probate but remain in the gross estate under IRC §§ 2040 and 2039.
• Below-AFR promissory notes: a 1% note when the AFR is 4% is a gift of the interest differential every year and undermines the installment sale.

Side-by-side: New York estate tax with and without lifetime trust funding

The table shows 2026 New York estate tax for a single New York resident, assuming completed gifts to an irrevocable trust more than three years before death and no other deductions. Federal tax is noted separately. Figures are rounded and illustrative.

At $10 million and $15 million there is no federal estate tax in 2026 for a single person, so the New York figures are the whole picture. At $25 million, the $10 million of lifetime gifts uses $10 million of the $15 million federal exclusion, leaving $5 million of exclusion to shelter the estate at death; the remaining $15 million estate would owe federal tax on roughly $10 million (less a deduction for New York estate tax paid under IRC § 2058), but the gifts have frozen the value of the transferred assets and removed all post-gift growth from both tax bases. The right mix at that level usually combines a SLAT, an IDGT sale of discounted LLC interests and an ILIT to supply liquidity.

Three New York fact patterns

These are composite illustrations drawn from the kinds of situations New York families bring to us. They are not descriptions of specific clients or outcomes.

A widow in Brooklyn owns a two-family house, a brokerage account and an IRA with a combined value of about $8.2 million. She is $500,000 over the cliff and faces roughly $800,000 of New York estate tax. Her children are adults. Annual exclusion gifts to five children and grandchildren ($95,000 a year) and a $600,000 gift to an irrevocable trust, made while she is in good health and followed by three years of survival, bring the estate below $7,350,000 and the New York tax to zero. If she dies within three years of the $600,000 gift, it is added back; the annual exclusion gifts are not.

A married couple in Manhattan with $16 million, mostly in a co-op and a closely held business, have wills leaving everything to each other. On the first death nothing is taxed because of the marital deduction, but the first spouse's New York exclusion is lost. On the second death the survivor's $16 million estate owes about $2 million to New York. Rewriting the wills to fund a credit shelter trust at the first death with up to $7,350,000, and funding a SLAT with business interests during both lives, addresses both the lost exclusion and the growth in the business.

A Queens physician with a $4 million practice building and a $6 million investment portfolio wants the building to pass to a child who works in the practice. Contributing the building to an LLC, obtaining a qualified appraisal with lack-of-control and marketability discounts, and selling a non-controlling interest to an IDGT for an AFR note freezes the building's value in the estate at the note amount and shifts the growth to the trust. The seed gift is subject to the three-year add-back; the sale is not. An ILIT funded with annual exclusion gifts supplies liquidity for whatever New York tax remains.

Frequently asked questions

Can I avoid the New York estate tax by moving to Florida?

A non-resident decedent pays New York estate tax only on real property and tangible personal property located in New York (Tax Law § 960). A former New Yorker who keeps a Manhattan apartment remains taxable on it. Changing domicile requires moving the center of your life, not just your driver's license, and New York audits domicile claims aggressively. Holding New York real estate through an LLC converts it to an intangible for this purpose in many cases, but the structure must be respected in practice.

If New York has no gift tax, why not give everything away now?

Three reasons. Gifts use federal exclusion that you may want at death. Gifted assets keep your income tax basis rather than receiving a step-up under IRC § 1014, which matters for low-basis real estate and founder stock. And you lose access to the assets. SLATs, retained swap powers and installment notes are the tools that soften each of those costs.

Does New York tax life insurance?

Life insurance on your own life that you own is in your gross estate under IRC § 2042 and therefore in your New York estate. Insurance owned from inception by an ILIT is not. Insurance is often what pushes a New Yorker over the cliff without the family realizing it.

Will the New York exclusion change?

The basic exclusion amount is indexed annually under § 952(c) and has risen from $5,250,000 in 2017 to $7,350,000 in 2026. The 105% cliff and the 16% top rate have not changed. The three-year add-back has been extended each time it approached its sunset.

Sources

• New York Tax Law § 952 (basic exclusion amount and rate schedule): nysenate.gov/legislation/laws/TAX/952
• New York Tax Law § 954 (New York gross estate; three-year gift add-back): nysenate.gov/legislation/laws/TAX/954
• New York Tax Law § 605 (resident and exempt resident trusts): nysenate.gov/legislation/laws/TAX/605
• EPTL 10-6.6 (decanting): nysenate.gov/legislation/laws/EPT/10-6.6
• EPTL 7-1.9 (amendment of irrevocable trust with consent): nysenate.gov/legislation/laws/EPT/7-1.9
• New York Department of Taxation and Finance, Estate Tax: tax.ny.gov/pit/estate
• Internal Revenue Service, Estate Tax: irs.gov estate tax
• Internal Revenue Service, Applicable Federal Rates: irs.gov/applicable-federal-rates

Planning for a New York estate over $7 million

The New York cliff rewards early action. A gift made at 68 and survived by three years removes the asset and its growth from the New York estate; the same gift made at 88 may be added back in full. For the individual trusts discussed here, our New York City trust attorney page covers drafting and trustee selection, and our page on wills in New York City covers the credit shelter and QTIP provisions a married couple needs. The Law Offices of Albert Goodwin represents New York residents in estate planning and in the Surrogate's Courts of New York City, Brooklyn and Queens. Call 212-233-1233 or email [email protected] to discuss your estate and the New York tax it currently faces.