New York Estate Planning and Taxes: The Complete 2026 Guide

A client came to me last spring. She'd just inherited her father's estate — a Park Slope brownstone and an investment portfolio totaling about $9.5 million. Her father had a will. The estate went through probate without any disputes.

But she also inherited a tax bill she didn't expect. New York State estate tax: over $300,000. The federal estate tax: zero (the estate was below the federal exemption). The New York bill was entirely avoidable with planning her father never did.

New York's estate tax is separate from the federal estate tax, applies at a lower threshold, and has a cliff provision that can produce brutal results for estates just over the exemption. Every New Yorker with assets approaching $7 million needs to understand these rules.

This is the guide I give clients who want to understand how taxes actually work in New York estate planning — not theoretical concepts, but the specific numbers, the real traps, and the strategies that actually reduce exposure.

New York State Estate Tax in 2026

The Exemption: $7.16 Million

New York's estate tax exemption for 2026 is $7.16 million per individual. The exemption adjusts annually for inflation under Tax Law Section 952.

For estates at or below $7.16 million: no New York estate tax owed.

For estates above $7.16 million: New York estate tax applies to the entire taxable estate — not just the amount above the exemption. This is the "cliff" provision, and it's uniquely harsh.

The New York Estate Tax Cliff: The Most Dangerous Provision You've Never Heard Of

Most people assume estate taxes work like income taxes: you pay a rate on the amount above the threshold, not on everything. That's how the federal estate tax works. New York's estate tax does NOT work that way.

In New York, if your taxable estate exceeds 105% of the exemption ($7.518 million in 2026), the exemption is eliminated entirely. Your estate is taxed on its full value — not just the excess above $7.16 million.

This creates a "cliff zone" between $7.16 million and $7.518 million where the estate tax bill can be hundreds of thousands of dollars on a small additional amount of value. Here's what this looks like with actual numbers:

New York Estate Tax Rates

New York's estate tax is progressive, with rates starting at 3.06% on the first bracket and rising to 16% on the highest bracket. The top rate of 16% applies to taxable estates over approximately $10.1 million.

New York does not currently allow "portability" of the unused exemption between spouses the way federal law does. Each spouse has their own exemption. If the first spouse dies with an estate under $7.16 million and uses no strategies to preserve their exemption, it's potentially gone.

Federal Estate Tax in 2026

The Federal Exemption: $13.99 Million

The federal estate tax exemption in 2026 is $13.99 million per individual ($27.98 million per married couple with portability election). The top federal estate tax rate is 40%.

For most New Yorkers — even those with significant estates — the federal estate tax is not the immediate concern. Unless your combined estate exceeds $14 million for a single person or $28 million for a married couple, federal estate tax isn't an issue in 2026.

But: watch for 2026 sunset provisions. The Tax Cuts and Jobs Act (TCJA) increased the federal exemption significantly in 2018. Some of those provisions are scheduled to sunset. Congressional action can change the federal exemption with relatively little notice. Planning for what might happen requires flexibility — trusts that can be adapted rather than structures locked in permanently.

Federal Portability: A Powerful Tool for Married Couples

Federal law allows a surviving spouse to claim the deceased spouse's unused federal exemption — called the Deceased Spousal Unused Exclusion (DSUE). This requires timely filing of a federal estate tax return (Form 706) even if no tax is owed, within nine months of death (with a six-month extension available).

For a married couple with a combined estate of $20 million, portability allows the surviving spouse to use the deceased spouse's $13.99 million exemption. Combined with their own $13.99 million exemption, the surviving spouse effectively has a $27.98 million federal exemption. No federal tax at first death. Potentially reduced tax at second death.

The critical point: you must file Form 706 to claim portability. Many families with estates below the taxable threshold don't file, forfeiting this benefit entirely. If your spouse has died and you haven't filed an estate tax return, talk to an estate planning attorney immediately. There may be options under the late portability election rules.

New York's Unique Gift Tax Rule: The Three-Year Lookback

This is one of the most important — and most overlooked — differences between New York and federal estate tax law.

Federal law has no gift tax lookback rule for estate tax purposes. You can give away $13.99 million in gifts the day before you die, and it's not added back to your taxable estate for federal purposes (though it uses your lifetime exemption).

New York is different. Under Tax Law Section 954(a)(3), gifts made within three years of death are added back to the New York taxable estate. The purpose is to prevent deathbed gifting to avoid New York estate tax. Any taxable gift made after January 1, 2019, within three years of death, is included in the New York gross estate.

Practical implication: New York estate tax planning requires starting at least three years before death to be effective. If you make large gifts in your final three years of life — even gifts that would completely reduce the taxable estate below the exemption — New York adds them back in. The strategy fails.

This is why "I'll just give my house to my kids when I'm sick" is not a valid New York estate tax strategy.

Gift Tax: Annual Exclusion and Lifetime Exemption

Annual Exclusion ($18,000 in 2026)

You can give up to $18,000 per recipient per year (in 2026) without filing a gift tax return and without using any lifetime exemption. A married couple can give $36,000 per recipient per year through "gift splitting."

A family with 4 children and 8 grandchildren can transfer $18,000 × 12 = $216,000 per year ($432,000 for a couple) completely tax-free. Over 10 years, that's $4.32 million removed from a taxable estate — permanently, with no gift tax, no return required, and no New York three-year lookback problem (annual exclusion gifts are specifically excluded from the New York addback rule).

Annual gifting is one of the most straightforward, lowest-risk estate tax strategies available. If you're approaching the New York exemption threshold, start making annual gifts now.

Tuition and Medical Expense Exclusion

In addition to the annual exclusion, direct payments to educational institutions (for tuition only, not room and board) and direct payments to healthcare providers are completely gift-tax-free with no dollar limit. This exclusion is separate from the $18,000 annual exclusion. You can pay your grandchild's $65,000-per-year college tuition directly, and it doesn't count as a taxable gift at all.

Capital Gains and the Stepped-Up Basis

The Step-Up: One of the Best Tax Rules in Existence

Under IRC Section 1014, the tax basis of assets that pass at death is "stepped up" to fair market value on the date of death. This means heirs who inherit appreciated assets — a house, a stock portfolio, a business — can sell them immediately for zero federal capital gains tax (as long as they sell promptly after inheriting).

For New Yorkers who've owned their homes for decades, this is a massive benefit. A home purchased for $200,000 in 1985 that's worth $2.5 million today: the heirs inherit a $2.5 million basis. Zero capital gains tax on immediate sale. Combined federal and New York capital gains rates on a $2.3 million gain would otherwise be roughly 35-40% — over $800,000 in taxes. The step-up eliminates that entirely.

Don't Gift Highly Appreciated Assets During Life

The flip side of the step-up benefit is the "carryover basis" rule for lifetime gifts. If you give your house to your children during your lifetime (as an outright gift), they take your original basis — $200,000. When they sell for $2.5 million, they owe capital gains on $2.3 million.

The general rule: don't give away highly appreciated assets during your lifetime. Let them pass at death and receive the step-up. The estate tax benefit of removing them from your estate usually doesn't outweigh the capital gains cost of losing the step-up — unless your estate is large enough that the New York estate tax savings exceed the capital gains tax cost.

This is a calculation your estate planning attorney and CPA need to work through together with actual numbers from your specific situation.

New York Income Tax on Trust Income

Trusts are separate taxpayers in New York. New York's top income tax rate on trusts is 10.9% — among the highest in the nation. Trusts reach this top rate at a relatively modest income level.

This creates an important planning consideration for testamentary trusts and other trusts that accumulate income. If a trust holds income-producing assets — a rental property, a bond portfolio — the trust income is taxed at New York's top rate. Distributing that income to beneficiaries may result in lower overall tax if the beneficiaries are in lower brackets.

Grantor trusts — where the grantor is treated as the owner for income tax purposes — offer a different structure. The grantor pays income tax on trust income personally, which is itself an estate-reduction strategy (the tax payment reduces the grantor's estate without being treated as a taxable gift).

Strategies That Actually Work in New York

1. Annual Gift Program

As described above. Start immediately. Use the full $18,000 per recipient per year. For large families, this can remove millions from a taxable estate over time without any gift tax, any lookback risk, or any complex planning structure.

2. Irrevocable Life Insurance Trust (ILIT)

Life insurance death benefits are generally not subject to income tax. But if you own the policy at death, the death benefit is included in your taxable estate for New York and federal purposes. A $2 million life insurance policy owned by you is a $2 million addition to your taxable estate — potentially triggering $300,000 or more in New York estate tax.

An Irrevocable Life Insurance Trust (ILIT) owns the policy instead of you. The death benefit goes to the trust, outside your estate. The trust distributes the proceeds to your heirs estate-tax-free. The annual gifting strategy funds the premium payments. It requires careful drafting and administration — the "Crummey power" provisions must be properly implemented — but it's one of the most effective estate tax strategies for New Yorkers with significant life insurance.

3. Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust funded with one spouse's assets, naming the other spouse as a discretionary beneficiary. The assets leave the grantor's taxable estate. The beneficiary spouse retains access to the trust through discretionary distributions for health, education, maintenance, and support.

This structure uses the federal lifetime exemption while keeping some indirect access to the gifted assets. For married couples with large estates, SLATs are one of the most powerful tools in 2026 — particularly while the federal exemption remains high.

4. Grantor Retained Annuity Trust (GRAT)

A GRAT lets you transfer appreciating assets to heirs with minimal gift tax. You transfer assets to the trust, receive an annuity back for a fixed term (typically 2-10 years), and at the end of the term, the remaining assets pass to your beneficiaries. If the assets grow faster than the IRS discount rate (the "7520 rate"), the excess appreciation transfers gift-tax-free.

GRATs require the grantor to survive the trust term. They work best in low-interest-rate environments and with assets expected to appreciate significantly. Not everyone's situation supports a GRAT, but for business owners and equity investors with concentrated positions, they can be extraordinarily effective.

5. Charitable Planning

Charitable bequests reduce your taxable estate. For clients with philanthropic goals, a Charitable Remainder Trust (CRT) can provide income during life, a current income tax deduction, and a charitable deduction against the estate tax. See our guide to charitable giving and estate planning in New York for more detail.

6. Family Limited Partnership (FLP) or LLC Discounts

Transferring business or real estate assets into a family limited partnership (FLP) or LLC and then gifting limited partnership or membership interests can qualify for valuation discounts of 25-40% for lack of marketability and lack of control. A $1 million interest in a family LLC might be valued at $650,000 for gift and estate tax purposes if properly structured.

This is an aggressive strategy that the IRS scrutinizes closely. It requires legitimate business purpose beyond just estate tax savings, proper documentation, respect for the entity's formalities, and careful appraisal work. Done correctly, it's legal and effective. Done sloppily, it's challenged and potentially disallowed.

When to Start Planning

If your estate is approaching $7 million, start planning now. Don't wait until you're sick or until the exemption decreases. The three-year lookback rule means the clock starts running the moment you make a gift. The longer you wait, the fewer tax-efficient options you have.

Review your plan every 2 to 3 years. Asset values change. The law changes. The federal exemption may decrease. New York's exemption adjusts annually. What worked in 2022 may not be optimal in 2026.

For additional resources on New York estate tax planning, visit morganlegalny.com/estate-planning/.