A couple I met last month bought their Manhattan co-op in the late 1980s. For decades, it was simply their home. Now, with an appraised value over $4 million, it has become the primary driver of their estate’s value—pushing them closer to the New York estate tax threshold than they ever imagined. Their question to me was straightforward: “We’ve heard about putting the apartment in a trust to avoid taxes. Does that actually work?”
It’s a common question, but it’s often based on a slight misunderstanding of how our state’s laws operate. The goal isn’t just to move an asset—it’s to do so with deliberate intent and a full understanding of the consequences.
New York Has an Estate Tax, Not an Inheritance Tax
First, a clarification. Many people use “inheritance tax” and “estate tax” interchangeably, but they are fundamentally different. An inheritance tax is paid by the person who receives the property. An estate tax is paid by the estate of the person who has passed away before any property is distributed.
New York is one of a handful of states with its own estate tax—it does not have an inheritance tax. This is a critical distinction. The tax liability falls on the total value of your estate, not on your individual heirs. As of 2024, an estate valued at more than $6.94 million is subject to this tax. If your estate’s value is even 5% over this exemption amount, the entire estate is subject to the tax, not just the overage. This is what we call the “cliff,” and it can result in a significant and unexpected tax bill for your family.
The question, then, isn’t about avoiding inheritance tax for your children. The real question is whether a trust can legally remove your home from your taxable estate, keeping its value below that cliff.
The Irrevocable Trust: A Powerful but Permanent Tool
The only type of trust that can achieve this tax objective is an irrevocable trust. The name tells you everything—once you create it and transfer assets into it, you generally cannot change your mind or take the assets back. You relinquish control.
When you transfer your home to a properly structured irrevocable trust—such as a Qualified Personal Residence Trust (QPRT)—you are making a completed gift to the trust. You no longer legally own the property. Consequently, upon your death, the home is not part of your estate and its value is not counted toward the New York estate tax exemption. This can be an effective strategy for families whose primary residence is their most significant asset.
But this comes with serious trade-offs. As the grantor, you give up the right to sell the home on your own or take out a mortgage. You become a tenant, often paying fair market rent to the trust after an initial term of years expires. The property is now managed by a trustee—a person you appoint—for the benefit of your chosen beneficiaries. This is a profound shift in ownership and control that must be considered carefully.
Beyond the Estate Tax: Other Considerations
While tax avoidance is a major motivator, it should not be the only one. Placing a home in an irrevocable trust can also serve other legacy goals. For instance, it provides a structure for generational ownership of a cherished family property, protecting it from the creditors or marital disputes of a future beneficiary.
However, there are contingencies to plan for. What if you decide to move? What happens if the property requires a major capital improvement? These scenarios must be addressed in the trust document itself. The fiduciary duty of the trustee is to the beneficiaries, not to you, and the trust’s terms will dictate what is possible.
We also must be mindful of New York’s three-year “look-back” rule for large gifts. Under Article 26 of the New York Tax Law, taxable gifts made within three years of your death can be “clawed back” and included in your taxable estate. This means that transferring your home into a trust is not a last-minute decision; it requires foresight and long-term planning.
Stewardship Requires a Clear View of Your Assets
Using a trust to hold real estate can be a prudent part of a larger plan, but it is not a default maneuver. It is a specific tool for a specific situation—typically for those whose estates are at or near the state exemption threshold and who are comfortable ceding direct control of their property to protect their legacy.
Before considering any trust strategy for your home, the essential first step is a clear accounting of your total net worth. We often begin by helping clients create a confidential asset summary to determine if they are likely to be subject to the New York estate tax. Only then can we have a productive conversation about the right path forward for your family.
