A client from Brooklyn called me last week. Her mother had passed away, leaving the family brownstone—owned for fifty years—in a living trust. The daughter, now the successor trustee, had a pressing question: “My mother put the house in a trust so we could avoid probate. Does that mean we also avoid taxes?” This is a common question, and the answer isn’t always what people expect. A trust simplifies the transfer of a home, but the tax question is another matter entirely.
First, we must clarify the terminology. Many people say “inheritance tax,” but New York does not have one. An inheritance tax is paid by the person receiving the property. New York has an estate tax, levied on the total value of the deceased’s assets before they are distributed. The estate itself—not the individual beneficiaries—is responsible for paying this tax.
This distinction is more than semantics. It shifts the focus from what a beneficiary receives to the total value of what the parent left behind. Whether that Brooklyn brownstone is subject to estate tax depends not on the trust alone, but on the value of the mother’s entire estate.
Revocable Trusts and the Taxable Estate
Most people who use a trust as their primary estate planning tool use a revocable living trust. This instrument is effective for its main purpose: avoiding the time and expense of Surrogate’s Court. During your lifetime, you retain complete control over the assets in the trust. You can sell the property, refinance it, or even dissolve the trust entirely.
Because you retain that control, the IRS and the New York State Department of Taxation and Finance consider those assets part of your taxable estate. The trust is a mechanism for transfer and management, a form of stewardship, but it does not remove the asset from your estate for tax calculation purposes.
For the client in Brooklyn, the value of the brownstone is added to her mother’s bank accounts, investments, and other assets to determine the estate’s total value. Under New York Tax Law, Article 26, an estate is only taxed if its total value exceeds a specific exemption threshold. For 2024, that amount is $6.94 million. If the mother’s total estate is below this number, no New York estate tax is due. If it is over, the tax is calculated on the entire amount, not just the portion above the exemption.
Irrevocable Trusts: A Different Story
The conversation changes with certain types of irrevocable trusts. Unlike a revocable trust, when you place an asset into an irrevocable trust, you are giving up control and ownership. It is a permanent transfer. This is not a step to be taken lightly—you cannot simply change your mind and take the house back.
If structured properly, a home transferred to a well-drafted irrevocable trust, such as a Qualified Personal Residence Trust (QPRT), can be removed from your taxable estate. This is an advanced strategy, often used by individuals whose estates are projected to exceed the New York State or federal estate tax exemptions. It requires deliberate, long-term planning. The transfer must be made years before death to be effective. This is not a simple DIY document; it is a sophisticated legal instrument for generational wealth preservation.
The Step-Up in Basis: A Critical Tax Benefit
While a revocable trust may not avoid estate taxes, it does preserve a significant tax advantage for your beneficiaries: the “step-up” in cost basis. Let’s return to the brownstone. The mother might have paid $50,000 for it in 1974. If she had gifted it to her daughter while she was alive, the daughter would have inherited that $50,000 cost basis. If the daughter then sold it for its current market value of $2 million, she would face a staggering capital gains tax on the $1.95 million profit.
By passing the home through her estate via the trust at death, the property’s cost basis “steps up” to its fair market value on the date of her passing. If that value is $2 million, the daughter’s new basis is $2 million. Should she sell it immediately for that price, her capital gain would be zero. No capital gains tax. This is one of the most powerful benefits of passing assets at death rather than gifting them during life. It is a prudent strategy that can save a family hundreds of thousands of dollars.
Understanding which tax applies—estate tax or capital gains tax—and how a trust affects each one is fundamental to true legacy planning. It is how the assets you’ve worked a lifetime to build are passed to the next generation efficiently and intact.
If you are serving as a trustee or are planning your own estate, the interplay between your assets and tax law is critical. A prudent next step is to have your existing trust documents reviewed to confirm how your property will be treated for tax purposes. We regularly provide a 30-minute document review for families to clarify these exact points and identify potential contingencies.
