I. Overview:
Given the recent increase in the federal estate tax exemption (see this article), it is important to review New York State’s estate tax. This article provides an overview of New York’s estate tax and offers ways to avoid its punitive effects.
II. The New York Estate Tax “Cliff”:
The New York State estate tax exemption (the “Exemption” or the “Threshold”) represents the total amount that you can leave to others at death without incurring New York State estate tax. Once your taxable estate exceeds the Threshold, New York State imposes a tax at graduated rates ranging from 3.06% to 16%.
The Exemption is set at $7,350,000 for 2026. Once your taxable estate exceeds this Threshold, it enters the “Cliff Range” (for 2026, between $7,350,001 million and $ 7,717,500), and the Exemption rapidly phases out. Further, if the value of your estate exceeds the Threshold by more than 5%, your estate will receive no Exemption at all from New York State. This can cause your estate to owe more estate tax than the portion that exceeds the threshold. This scenario is illustrated in the examples below.
III. The Impact:
Example 1: Estate below the Threshold
Decedent A dies in New York on October 1, 2026 with a $7.3 million estate. Because A’s estate is below the Threshold, A’s estate owes no New York estate tax.
Example 2: Estate within the Cliff Range
Decedent B dies in New York on October 1, 2026 with a $7.4 million estate. Despite being only $50,000 over the Threshold, B’s estate will owe more than $136,000 in New York estate tax, representing an effective tax rate of over 250%.
Example 3: Estate greater than 5% of the Threshold
Decedent C dies in New York on October 1, 2026 with a $7.8 million estate. Because C’s estate is over the Threshold by $450,000 (more than 5%), C’s estate receives no Exemption at all. This means that C’s estate will owe over $745,000 in New York estate tax, despite being only $450,000 over the Threshold. This represents an effective tax rate of over 160%.
IV. How to Avoid the Cliff:
1. Lifetime Gifts
New York state does not currently impose a gift tax. Therefore, you can gift assets to others, or to certain types of trusts for their benefit, to reduce your taxable estate. The catch is that you must survive at least three years from the date you make the gift. If not, New York State will value your estate as if you never made the gift.
2. Disclaimer Trusts
A disclaimer trust is an estate planning tool that provides a surviving spouse flexibility after the first spouse passes away. Instead of automatically receiving the assets from the deceased spouse, the surviving spouse can disclaim (legally refuse) part or all of the inheritance in order to fully utilize the deceased spouse’s Exemption. The disclaimed assets can then pass to a trust, which is often referred to as a bypass or a credit shelter trust. The disclaimed assets should thereafter not be considered part of the surviving spouse’s estate for estate tax purposes.
3. Formulaic Charitable Contributions (the “Santa Clause”)
Including a provision in your estate planning documents that donates to charity the amount above the Threshold can help avoid the Cliff. This provision, sometimes called a “Santa Clause”, should be drafted to apply only when the charitable donation would be less than the estate tax owed without it. The following example illustrates a Santa clause.
Example 4: The Santa Clause
Decedent D dies in New York on October 1, 2026 with a $7.4 million estate. As shown in Example 2 above, without proper planning, D’s estate would owe over $136,000 in New York estate tax. However, D’s estate planning documents contain a Santa Clause, so a charity of D’s choice will receive $50,000, bringing the value of D’s taxable estate down to the Threshold. This represents a net benefit to the estate of over $86,000.
Jesse Frost is an associate in Twomey Latham’s Trusts and Estates department. This publication is for general information purposes only and does not constitute legal advice. The author of this article is available to discuss its contents at your convenience.
