How to Reduce New York Estate Taxes

Last updated: June 2024. Written by Albert Goodwin, Esq., New York estate planning and probate attorney, Law Offices of Albert Goodwin.

New York is one of the few states that still imposes its own estate tax, and it does so under New York Tax Law Article 26. For New York families, reducing estate tax is not just about the federal exemption — it is about navigating New York's unusually harsh "cliff," the three-year gift add-back, and the federal exemption reduction scheduled for the end of 2025. This page focuses specifically on how to lower a New York estate tax bill. For related strategies, see our pages on advanced NY estate planning techniques, the benefits of a living trust, and charitable will planning in NYC.

Current Federal and New York Exemption Amounts

The numbers below are point-in-time figures that are adjusted for inflation and should be verified for the year of planning or death. As of 2024:

• Federal estate and gift tax exemption: $13.61 million per individual (IRC § 2010). This amount is scheduled to drop by roughly half — to an inflation-adjusted figure in the neighborhood of $7 million per person — on January 1, 2026, unless Congress extends it (the "sunset" of the 2017 Tax Cuts and Jobs Act).
• Federal top estate tax rate: 40% on amounts above the exemption.
• Federal annual gift exclusion: $18,000 per recipient in 2024 (IRC § 2503(b)).
• New York estate tax exemption ("basic exclusion amount"): $6.94 million per individual for deaths in 2024 (NY Tax Law § 952). This amount is indexed annually.
• New York estate tax rate: Graduated, up to 16% on the taxable estate above the exclusion.
• New York gift tax: None. New York repealed its gift tax in 2000 — but see the three-year add-back below.

The New York Estate Tax Cliff — and Why It Matters

New York's exemption is not a true exemption for larger estates. Under NY Tax Law § 952(c)(2), the basic exclusion phases out completely once the New York taxable estate exceeds 105% of the exclusion amount. Cross that line and you lose the exemption entirely — your whole estate becomes taxable, not just the amount over the exclusion. This is the so-called "cliff."

A worked example using the 2024 exclusion of $6.94 million:

• Estate just under the cliff (105% = $7,287,000): The exemption still shields the first $6.94 million, so only a modest amount is taxed. New York estate tax is a few hundred thousand dollars at most.
• Estate just over the cliff (106% ≈ $7.36 million): The exemption vanishes. The entire $7.36 million is taxed at New York's graduated rates, producing a New York estate tax bill in the range of roughly $680,000.

In other words, an estate that is only about $70,000 larger can owe several hundred thousand dollars more in tax. This is sometimes called the "cliff tax," because the marginal tax rate in the phase-out band can exceed 100%. The planning lesson is that for estates hovering near the cliff, reducing the taxable estate by even a small amount — often through a charitable bequest — can save far more than the amount given away.

The "Santa Clause" Charitable Bequest

A well-drafted New York will or trust can include a formula charitable bequest that automatically funds a gift to charity in exactly the amount needed to bring the estate back under the cliff. For an estate sitting just over 105% of the exclusion, directing a relatively small charitable gift can restore the full New York exemption — turning a six-figure tax into little or nothing while supporting a cause the family cares about. See our NYC charitable will attorney page for how these clauses are structured.

The New York Three-Year Gift Add-Back

Because New York has no gift tax, lifetime gifting is a powerful tool to shrink a taxable estate. But there is a catch unique to New York: under NY Tax Law § 954(a)(3), any taxable gift made within three years before death is added back into the New York gross estate. Gifts that fall within the annual exclusion are generally not affected, but larger gifts made in the final three years of life will be pulled back into the estate.

Practical takeaways for New Yorkers:

• Larger gifts intended to reduce New York estate tax are most effective when made well before the final three years of life — planning earlier matters.
• Gifts made by a non-resident, or gifts of property not subject to New York tax, may fall outside the add-back; this is fact-specific and should be reviewed with counsel.
• Annual-exclusion gifting ($18,000 per recipient in 2024) remains a clean, steady way to move wealth out of a New York estate over time.

The 2025 Federal Sunset — A Closing Window

The federal exemption is scheduled to fall by roughly half after December 31, 2025. The IRS has confirmed there will be no "clawback" — exemption used while the higher amount is in effect will not be retroactively taxed if the exemption later drops. For wealthier New York families, this creates a genuine use-it-or-lose-it window to make large lifetime gifts before 2026. Because New York has no gift tax, lifetime gifting can reduce both federal and New York exposure — but remember the three-year add-back when timing larger New York gifts.

Strategies often used to lock in the higher federal exemption before sunset include irrevocable grantor trusts and spousal lifetime access trusts (SLATs), which let one spouse use exemption while the other spouse retains indirect access to the gifted assets. These are discussed in more detail on our advanced NY estate planning techniques page.

Spousal Planning: Marital Deduction, Credit Shelter, and Portability

The unlimited marital deduction (IRC § 2056) allows transfers of any amount to a U.S.-citizen spouse free of federal and New York estate tax. But leaving everything outright to a spouse can waste the first spouse's exemption. Two points specific to New York:

• New York has no portability. Unlike the federal system, New York does not allow a surviving spouse to carry over the deceased spouse's unused New York exclusion. To preserve the first spouse's $6.94 million New York exclusion, a credit shelter (bypass) trust is generally required.
• Federal portability still exists. A surviving spouse can elect to use the deceased spouse's unused federal exemption (DSUE) by filing a federal Form 706, even when no federal tax is due. This protects the federal exemption but does nothing for New York.

Worked example: A married couple has a combined estate of $13 million, all jointly held. If the first spouse leaves everything outright to the survivor, no exemption is sheltered at the first death; when the survivor dies with the full $13 million, only one New York exclusion (about $6.94 million) applies, leaving roughly $6 million exposed to New York tax — and a $13 million estate is far over the cliff. By instead funding a credit shelter trust with about $6.94 million at the first death, that amount is sheltered using the first spouse's New York exclusion, and the survivor's own exclusion can shelter much of the rest — dramatically reducing or eliminating the New York estate tax. A QTIP trust can also be used to control the ultimate disposition of assets while still qualifying for the marital deduction; for the trust mechanics, see advantages and disadvantages of a testamentary trust.

Lifetime Gifting and Crummey Trusts

Annual-exclusion gifts ($18,000 per recipient in 2024; double for married couples electing to split gifts) remove not only the gifted amount but all future appreciation from your estate. A couple with three children and one grandchild could move $144,000 per year out of their estate using the 2024 exclusion ($18,000 × 4 recipients × 2 spouses).

To make gifts to a trust qualify for the annual exclusion, the trust must give beneficiaries a temporary right to withdraw the contribution — a Crummey withdrawal right (named after the Crummey v. Commissioner case). The beneficiary is given written notice and a limited window (often 30 days) to withdraw the gift; because the beneficiary could withdraw it, the gift counts as a "present interest" eligible for the annual exclusion, even though in practice the funds usually remain in trust for the beneficiary's long-term benefit. This is the standard mechanism for funding trusts for minor children or beneficiaries who cannot yet manage money.

Life Insurance and the Irrevocable Life Insurance Trust (ILIT)

If you own your life insurance policy, or retain any "incidents of ownership" under IRC § 2042, the death benefit is included in your taxable estate. For a large policy, that inclusion can push an estate over the New York cliff and generate substantial tax on proceeds the family expected to receive tax-free.

An Irrevocable Life Insurance Trust (ILIT) owns the policy instead of you, keeping the proceeds out of both your federal and New York taxable estate. Premiums are typically funded through Crummey gifts to the trust. Two cautions: (1) if you transfer an existing policy to an ILIT, the three-year rule of IRC § 2035 applies — death within three years of the transfer pulls the proceeds back into the estate, so a newly purchased policy issued directly to the ILIT is cleaner; and (2) because the trust is irrevocable, it must be drafted carefully to meet IRS requirements.

Business and Real Estate Planning

Closely held businesses and New York real estate are often the largest — and least liquid — assets in an estate, and either can push a family over the cliff. Common tools include:

• Family limited partnerships / LLCs: may support valuation discounts for lack of control and marketability.
• Grantor retained annuity trusts (GRATs): transfer appreciation on a business or property while retaining an annuity, using little or no exemption.
• Qualified personal residence trusts (QPRTs): move a residence out of the estate at a discounted gift value while retaining the right to live in it for a term.
• Buy-sell agreements: set valuation and provide an orderly transition of a family business.
• IRC § 6166 installment payments: spread federal estate tax on a qualifying closely held business over up to roughly 14 years where the business exceeds 35% of the adjusted gross estate.

Generation-Skipping (GST) and Dynasty Planning

For families transferring wealth to grandchildren or later generations, the federal generation-skipping transfer tax (IRC § 2601) applies in addition to estate and gift tax. The GST exemption matches the federal estate exemption ($13.61 million in 2024) and is best allocated to high-appreciation assets held in long-term "dynasty" trusts. Note that New York does not impose a separate GST tax. Because the federal GST exemption is also tied to the 2025 sunset, families with multi-generational wealth should consider allocating it before the exemption drops.

Speak With a New York Estate Tax Attorney

New York's cliff, its lack of portability, and the three-year gift add-back make New York estate tax planning meaningfully different from federal-only planning. With the federal exemption set to fall after 2025, the planning window for larger estates is narrowing. The strategies above carry trade-offs and exacting technical requirements, and the right combination depends on the size of your estate, your family situation, and your goals.

To discuss reducing your New York estate tax exposure, call the Law Offices of Albert Goodwin at (212) 233-1233 to schedule a consultation.

This page is for general information about New York estate tax and does not constitute legal or tax advice. Exemption and exclusion amounts are adjusted annually and were current as of the last-updated date above; verify the figures for the applicable year before acting.