New York is one of only 12 states with its own estate tax. For many New Yorkers — especially those who own real estate in New York City — that tax is a real and significant expense. But it's also one of the most misunderstood taxes in estate planning.
I've had clients assume they'll owe nothing because "only billionaires pay estate tax." I've also had clients assume their entire estate will be taxed. Both are wrong. The reality is more nuanced, and the planning opportunities are significant.
Here's exactly how New York estate tax works in 2025.
Two Separate Taxes: Federal and New York
First, understand that federal estate tax and New York estate tax are completely separate. You might owe one, both, or neither. They have different exemptions, different rates, and different rules.
In 2025:
- Federal estate tax exemption: $13.61 million per person ($27.22 million for a married couple with proper planning)
- New York estate tax exemption: $7.16 million per person
Most New Yorkers won't owe federal estate tax. The $13.61 million federal exemption covers the vast majority of estates. But if you own a Manhattan apartment worth $2 million, have retirement accounts worth $800,000, and a life insurance policy worth $500,000, you could easily have a New York taxable estate of $4–5 million — well below the federal threshold but potentially approaching the New York exemption depending on your other assets.
The New York Estate Tax Exemption for 2025
The New York estate tax exemption for deaths occurring in 2025 is $7,160,000. This is indexed for inflation and increases modestly each year.
What counts toward the New York taxable estate? Almost everything you own at death:
- Real estate you own (at fair market value)
- Bank and investment accounts
- Retirement accounts (IRAs, 401ks — yes, these are included)
- Life insurance you owned at death
- Business interests
- Tangible personal property (art, jewelry, vehicles)
- Certain taxable gifts made within 3 years of death
Deductions are available for debts, funeral expenses, and charitable bequests. Assets passing to a surviving spouse (the marital deduction) are also deductible — no New York estate tax on assets going to a surviving spouse who is a U.S. citizen.
The New York "Cliff Effect" — What Everyone Gets Wrong
Here's the part that catches people completely off guard. New York's estate tax has what practitioners call a "cliff effect." It's unlike any other estate tax structure in the country.
In most states with estate taxes, you only pay tax on the amount above the exemption. Not New York.
In New York, once your estate exceeds 105% of the exemption, the entire estate is taxed — not just the excess. The exemption disappears entirely once you cross 105%.
Let's put numbers to it. For 2025:
- Exemption: $7,160,000
- 105% of exemption: $7,518,000
If your estate is $7,150,000 — just under the exemption — you owe zero New York estate tax.
If your estate is $7,200,000 — $40,000 over the exemption — you now pay tax on the entire $7,200,000, not just the $40,000 excess.
If your estate is $7,518,000 or above, you pay full New York estate tax on everything from dollar one.
The cliff in action: A $7.15 million estate owes $0 in New York estate tax. A $7.52 million estate might owe over $700,000. A $371,000 difference in estate size creates a $700,000 difference in tax. This is why estates between $7 million and $8 million require careful planning.
New York Estate Tax Rates
New York's estate tax rates are graduated, starting at 3.06% and reaching 16% on amounts over $10.1 million. Here's a simplified version of the rate schedule:
| Taxable Estate | Approximate Rate |
|---|---|
| $0 – $500,000 | 3.06% |
| $500,000 – $1,000,000 | 5% |
| $1,000,000 – $2,000,000 | 7% |
| $2,000,000 – $3,500,000 | 8.5% |
| $3,500,000 – $5,000,000 | 10.1% |
| $5,000,000 – $10,100,000 | 12% |
| Over $10,100,000 | 16% |
Note that the rates apply to the entire taxable estate once the cliff is exceeded — not just the amount above each bracket.
The Federal Estate Tax: What to Know for 2026
The current federal estate tax exemption of $13.61 million is set to sunset at the end of 2025. Under current law, it reverts to approximately $7 million (adjusted for inflation) in 2026.
If you have a larger estate, this matters significantly. Using the current high federal exemption before it drops — through lifetime gifts, certain trusts, and other strategies — could save your family millions. We're actively working with clients on this right now.
Does New York Have a Gift Tax?
No. New York has no gift tax. This is important.
The federal government taxes gifts above $18,000 per recipient per year (the 2024 annual exclusion). But New York doesn't tax gifts at all — with one major caveat.
New York adds back to the estate gifts made within 3 years of death. If you gave away $500,000 in the 2 years before you died, that $500,000 gets pulled back into your New York taxable estate. The 3-year clawback prevents deathbed gifting.
But gifts made more than 3 years before death are completely outside your New York taxable estate. This is a powerful planning opportunity for people who start early.
Estate Tax Planning Strategies for New Yorkers
If your estate might approach or exceed the $7.16 million New York exemption, here are the strategies we use.
1. The Marital Deduction and Credit Shelter Trust
Assets passing to a surviving spouse are exempt from New York estate tax under the unlimited marital deduction. But this only defers the tax — it doesn't eliminate it. When the second spouse dies with a combined estate, it all gets taxed at once.
A credit shelter trust (also called a bypass trust) uses the first spouse's New York exemption. At the first spouse's death, up to $7.16 million goes into a trust for the surviving spouse and children. The second spouse can use income from the trust. When the second spouse dies, the trust assets are outside their taxable estate.
Used correctly, a married couple can effectively shelter up to $14.32 million from New York estate tax. But New York doesn't have "portability" like the federal system — the credit shelter trust structure is essential. Without it, the first spouse's exemption is wasted.
2. Irrevocable Life Insurance Trust (ILIT)
If you own a life insurance policy at death, the death benefit is included in your taxable estate. On a $2 million policy, that's $2 million added to your New York taxable estate.
An ILIT owns the policy instead. The death benefit pays into the trust, completely outside your taxable estate. At the top New York rate (16%), keeping $2 million out of your estate saves $320,000 in New York estate tax alone.
3. Lifetime Gifting
Every dollar you give away more than 3 years before death reduces your New York taxable estate. The federal annual exclusion allows $18,000 per recipient per year with no gift tax. A married couple can give $36,000 per recipient per year. Over 10 years, that's $360,000 removed from the estate for each recipient — without using any lifetime exemption.
For clients with larger estates, we use 529 plans (education accounts), annual exclusion gifts, and other gifting strategies to reduce the estate systematically over time.
4. Charitable Giving Strategies
Charitable bequests in your will reduce your taxable estate. But there are smarter ways to give. A charitable remainder trust (CRT) lets you transfer assets into a trust, receive income for life, and have the remainder pass to charity at death. You get a current income tax deduction, the asset grows tax-free inside the trust, and it's removed from your taxable estate.
A donor-advised fund (DAF) is simpler. You contribute assets (cash, appreciated stock, real estate) and get an immediate tax deduction. The DAF invests the funds. You recommend grants to your chosen charities over time.
5. Qualified Personal Residence Trust (QPRT)
A QPRT lets you transfer your home to your children at a reduced gift tax value, while you retain the right to live there for a fixed term (say, 10 years). At the end of the term, the home belongs to your children outright — completely outside your taxable estate. If you outlive the term, you've successfully transferred a high-value asset at a fraction of its current value.
This strategy works especially well for high-value New York City real estate. A Manhattan apartment worth $3 million today could be worth $5 million in 10 years. Getting it out of your estate now, at a lower effective gift value, locks in that planning opportunity.
6. Spousal Lifetime Access Trust (SLAT)
A SLAT allows one spouse to make a large gift to an irrevocable trust for the benefit of the other spouse, removing those assets from the grantor's taxable estate. The beneficiary spouse can access trust funds during their lifetime. This strategy is particularly relevant right now, before the federal exemption potentially drops in 2026.
New York Estate Tax and Real Estate
For many New Yorkers, real estate is the primary estate tax concern. A brownstone in Park Slope or a co-op on the Upper West Side can easily put a family close to the New York exemption threshold even without other significant assets.
Options for real estate tax planning include:
- QPRT — transfer to children while retaining residence rights
- LLC structure — potentially applicable discount for minority interests (though New York courts scrutinize these)
- Charitable gift of a remainder interest — you keep the right to live in the home; charity gets it at death
- Lifetime gift more than 3 years before death — removes the property from your New York taxable estate entirely
Each strategy has trade-offs. A QPRT removes the stepped-up basis benefit. An outright gift triggers capital gains on transfer. We analyze each client's situation individually to identify the best approach.
Filing the New York Estate Tax Return
New York estate tax returns are due 9 months after the date of death. Extensions are available but the tax must still be paid by the original due date to avoid interest.
The New York estate tax return (Form ET-706) is filed with the New York State Department of Taxation and Finance. It requires valuation of all taxable assets, documentation of deductions, and calculation of tax owed.
Late filing penalties are significant. The penalty for failure to file is up to 25% of the tax due. Interest accrues monthly. Don't miss the deadline.
Non-Residents With New York Property
If you live in New Jersey, Connecticut, or Florida but own a New York apartment, New York still taxes you — but only on your New York-situated assets. The New York State tax applies to real property and tangible personal property physically located in New York.
This is a common situation. A retired couple moves to Florida (no state estate tax) but keeps their Manhattan co-op. New York Estate Tax still applies to the co-op's value. Proper planning can address this through entity structuring or lifetime transfer strategies.
Key Takeaway: New York estate tax has a $7.16 million exemption in 2025 — but the cliff effect means estates between $7.16 million and $7.52 million face especially harsh outcomes. Married couples need credit shelter trust planning, not just the marital deduction. And with the federal exemption potentially dropping in 2026, the window for high-exemption planning is open right now.
For comprehensive estate tax planning, visit our estate tax practice page. And for overall estate planning strategy, read our guide on estate planning in New York.
For current New York estate tax law and rate schedules, morganlegalny.com covers the current statutes and planning guidance.
