Most New Yorkers will never need to worry about federal estate taxes, due in part to the 2025 federal estate tax exemption of $13.99 million per individual or nearly $28 million for a married couple. However, high-net-worth and some mass affluent families should carefully consider estate planning strategies to address New York State’s estate tax, which applies to estates exceeding $7.16 million and includes several particularly punitive provisions.

Unlike the federal estate tax, which applies only to the portion of an estate exceeding the exemption, New York’s estate tax includes a “cliff” provision. If the total value of an estate exceeds 105% of the exemption amount ($7.518 million in 2025) then the entire estate becomes taxable, not just the amount above the exemption. However, estates that are valued between $7.16 million and $7.518 million are taxed with a smaller exemption amount as the estate grows larger.

New York’s estate tax rates start at a relatively low 3.06% and gradually increase, reaching a maximum of 16% for estates over $10.1 million.

For instance, an estate valued at $7.0 million would not be subject to New York estate tax while an estate of $7.2 million would face a relatively modest tax of approximately $108,000. However, once the estate exceeds 105% of the exemption amount the entire estate becomes taxable. As a result, an estate valued at $7.6 million would owe a significantly higher tax of about $718,800.

Families Under the Exemption

Families currently below the New York estate tax exemption by a few million dollars, and those with strong future earnings potential, may find themselves subject to the estate tax sooner than expected.

Growth of the current NY estate exemption versus the projected growth of a $5MM taxable estate

For example, a taxable estate of $5 million would be $2.16 million below the 2025 exemption of $7.16 million. However, assuming the exemption grows by 3% annually (adjusted for inflation) and the estate earns an 8% annual return, it would reach the projected $8.9 million exemption level in just 7.5 years. Additional savings or asset growth could accelerate that timeline. Given this potential risk, proactive estate tax planning is essential for families who may become subject to the New York estate tax in the future.

No Portability in New York

Unlike the federal estate tax exemption, which allows a surviving spouse to use any unused portion of their deceased spouse’s exemption (a feature known as “portability”), New York State does not offer this benefit. Without proper planning, this lack of portability can result in significant estate tax liability. For example, a New York couple with a combined estate of $10 million, split evenly between spouses, may end up paying NYS estate tax. If $5 million passes to the second spouse and the second spouse passes shortly thereafter with a $10 million estate, the resulting NY estate tax would be $1,067,600.

Equalizing estates

Unlike the previous example, many couples do not have their assets evenly divided between them. If a couple with a $10 million net worth holds all assets in one spouse’s name and that spouse dies first, the estate could immediately face a New York estate tax bill of $1,067,600. To help mitigate this, couples should consider how their assets are allocated. It may make sense to divide the assets in equal shares or allocate an amount close to the exemption amount for the older spouse and the rest to the younger spouse. In some cases, it may make sense to transfer lower-basis assets to the older spouse or the one with the shorter life expectancy in order to take advantage of a potential step-up in basis to fair market value at death.

Credit Shelter Trusts

One strategy to avoid estate tax at the death of the second spouse is to leave assets to a “credit shelter trust” (also known as a “bypass trust”) upon the first spouse’s death. This type of trust can provide the surviving spouse with income and, if needed, principal distributions for health, education, maintenance, and support (HEMS). Using the earlier example, where each spouse holds $5 million, if the first $5 million is placed in a credit shelter trust at the first death, and the surviving spouse dies shortly thereafter, no New York estate tax would be due on the full $10 million estate.

Pros and Cons of Credit Shelter Trusts

Credit shelter trusts come with both advantages and trade-offs. On the plus side, they offer the surviving spouse added protection from creditors. However, the surviving spouse does not have unrestricted access to the trust assets, which may be a drawback for some families. Additionally, these trusts involve ongoing administrative responsibilities and costs. For example, the trustee must file an annual Form 1041 income tax return for the trust.

It’s also important to consider that assets held in a credit shelter trust do not receive a second step-up in basis at the death of the surviving spouse. As a result, the next generation may face higher capital gains taxes when those assets are eventually sold, potentially offsetting the estate tax savings. Families should weigh the benefits of reducing estate tax through a credit shelter trust against the potential loss of a second basis step-up and the associated capital gains implications for heirs.

In addition, families should be thoughtful about which assets are best suited for funding a credit shelter trust. Funding the trust with income-producing assets can provide ongoing support to the surviving spouse, while allowing assets expected to appreciate significantly to remain in the surviving spouse’s estate and benefit from a second step-up in basis. Alternatively, in cases where future estate tax exposure is a concern, it may make sense to place highly appreciating assets in the trust to prevent further growth within the surviving spouse’s taxable estate.

Old Credit Shelter Trusts

It’s important for families to periodically review and update their estate planning documents to reflect changes in tax laws and evolving planning strategies. For instance, prior to 2014, New York’s estate tax exemption was just $1 million. Many older documents drafted during that time direct the full exemption amount to a credit shelter trust, which could now result in the trust being overfunded since the exemption is now much larger. Including language that gives the surviving spouse discretion to determine the amount allocated to the trust can provide greater flexibility and help avoid unintended tax consequences.

Disclaimer Trusts

Another strategy to reduce New York estate tax for a high-net-worth surviving spouse is the use of a “disclaimer trust.” Under this approach, estate documents can be drafted to allow all assets to pass to the surviving spouse using the unlimited marital deduction available to U.S. spouses. However, the surviving spouse may choose to “disclaim” a portion of the inheritance allowing those assets to instead pass into an irrevocable trust for the benefit of the couple’s children. It should be noted that the spouse must do so within nine months of the first spouse’s death.

To preserve the validity of the disclaimer, the surviving spouse must not take possession or control of the disclaimed assets. It is also essential to carefully assess the surviving spouse’s current and projected financial needs to ensure they retain sufficient resources. A strategy that saves on estate taxes but leaves the surviving spouse underfunded could lead to serious hardship. Like credit shelter trusts, disclaimer trusts do not receive a second step-up in basis at the second spouse’s death. Therefore, any potential estate tax savings should be weighed against the possibility of higher capital gains for the next generation.

Clayton Trust

An alternative to using disclaimer trusts for minimizing New York estate tax is a Clayton trust. This structure gives the executor the authority and flexibility to determine how much of the estate should be allocated to a credit shelter trust versus a qualified terminable interest property (QTIP) trust. Assets placed in the credit shelter trust are excluded from estate taxation at the death of both spouses, while the QTIP trust provides income access for the surviving spouse. By granting the executor discretion over the allocation, the burden of post-mortem estate tax planning is shifted away from the surviving spouse.

Santa Clauses

For estates just above New York’s 105% estate tax cliff, charitable giving can be a highly effective strategy and can sometimes reduce the estate tax by more than the actual amount donated. As an example, a $7.6 million estate would be liable for an estate tax bill of $718,800, but a donation to charity of $440,000 reduces the tax bill to $0. A clause in the estate documents could take effect during this type of situation.

Gifting Strategies for Families above the Exemption

While strategies such as disclaimers, credit shelter trusts, Clayton Trusts, "Santa Clause" provisions, and asset equalization can be highly effective for families with estates in the $5 million to $14 million plus range, families with significantly higher net worth may need to adopt more aggressive lifetime gifting strategies to reduce their estates below the combined New York estate tax exemption thresholds. Families should take advantage of the annual gift tax exclusion, which is $19,000 per donor per recipient in 2025. For example, a couple with three married children and five grandchildren could gift up to $418,000 annually by giving the full exclusion amount to each family member. This strategy can meaningfully reduce the size of their taxable estate and help bring it below exemption thresholds.

We often recommend that families consider making smaller gifts during their lifetime rather than through their will. Lifetime gifts not only allow recipients to benefit sooner, but they also avoid the possibility of revealing the full contents of the will. Additionally, families may want to accelerate gifting during market downturns or when asset values are temporarily depressed, as this can maximize the impact of both the annual gift exclusion and the lifetime exemption through strategic timing.

If the annual gift exclusion alone isn’t sufficient to meaningfully reduce a family’s taxable estate, a range of alternative gifting strategies may be appropriate, depending on the family’s goals, financial profile, and market conditions. One option is to make outright gifts using the lifetime federal estate and gift tax exemption, currently set at $13.99 million. Families with ongoing charitable giving goals might explore a charitable lead trust (CLT) to reduce their taxable estate, while those wishing to make significant charitable gifts in the future, while also retaining income in the meantime, may benefit from a charitable remainder trust (CRT). Although New York State does not impose a gift tax, gifts exceeding the annual exclusion amount must be reported on IRS Form 709, which also initiates the IRS statute of limitations.

It should be noted that interest rates often play a key role in determining which gifting strategies are most effective. In a high interest rate environment, structures like charitable remainder trusts (CRTs) and qualified personal residence trusts (QPRTs) tend to be more advantageous. Conversely, low interest rate environments generally favor strategies such as grantor retained annuity trusts (GRATs) and intentionally defective grantor trusts (IDGTs). In either case, wealthy families are often best served by implementing these strategies proactively, particularly in New York, where gifts made within three years of death may be pulled back into the estate under the state’s claw back rule.

It’s also important to consider the individual circumstances and tax profiles of the recipients when deciding which assets to transfer. For instance, it is typically more tax-efficient for a lower-income beneficiary to receive income-generating assets or those with large unrealized capital gains, while high-income recipients may benefit more from receiving tax-exempt assets like municipal bonds.

Gifting strategies for families above the NY estate exemption

Relocating to Avoid the Estate Tax

The most straightforward way to avoid New York estate tax is to establish residency in a state that does not impose one, such as Florida or Texas. However, successfully changing residency requires careful planning and coordination with a CPA and a financial advisor as the burden of proving a change in domicile rests with the taxpayer, not New York State. Simply spending fewer days in New York, using tracking apps like Monaeo, or obtaining a Florida driver’s license is probably not sufficient. A comprehensive strategy should be developed to ensure the individual satisfies both the statutory residency and multi-factor domicile tests required to demonstrate a legitimate change in residency.

New York Estate Tax and Business Owners

Business owners face a range of unique issues related to the New York estate tax. A significant estate tax liability for a business owner’s estate can create liquidity problems for both the family and the business, potentially forcing the sale of assets or disrupting operations.To mitigate this risk, owners should establish a comprehensive continuity plan to preserve the business’s value in the event of their passing. A well-rounded strategy should include a clear succession/exit plan and continuity plan, a properly structured and adequately funded buy-sell agreement (especially for those with partners), and, where appropriate, key person insurance to provide immediate liquidity and financial stability.

Avoiding Common Issues

New Yorkers should also be aware of potential non-estate tax pitfalls in their estate planning that can lead to costly disputes or unintended consequences. Common issues include appointing fiduciaries who are unfit or unqualified for the role, naming out-of-state fiduciaries without addressing related legal or tax complications, and using vague or ambiguous language in wills. Placing children who don’t get along into co-fiduciary roles can create unnecessary conflict, as can disinheriting family members without taking appropriate legal precautions. Other often-overlooked risks include failing to update documents to account for children born after the estate plan was executed or marriages that occur shortly before death as both of which can become flashpoints for litigation.

While federal estate taxes won’t impact most New Yorkers, New York State’s estate tax presents a significant concern for high-net-worth and mass affluent families. Fortunately, with proactive and well-structured planning, there are effective strategies available to minimize tax exposure and preserve wealth for future generations.

David Flores Wilson, CFP®, CFA, CM&AA, CEPA is a New York City-based CERTIFIED FINANCIAL PLANNER™ Practitioner & Managing Partner at Sincerus Advisory. Click here to schedule a time to speak with us.

New York Estate Tax Financial Planning Strategies