I recently met with a family whose mother had passed away in her Manhattan apartment. She had always been careful with her money and believed her estate was well under the federal tax exemption—which it was. What she did not account for was the New York estate tax. Her assets, including the apartment, totaled just over $7 million. Because of this, her children were facing a surprise tax bill of several hundred thousand dollars. They were shocked. They thought they were safe.
This is a story I see far too often. Many New Yorkers focus on the high federal estate tax exemption—$13.61 million per person in 2024—and assume their planning is complete. Yet, New York has its own, separate estate tax with a much lower exemption and a particularly unforgiving rule that catches many families off guard.
The New York “Cliff”—A Trap for the Unwary
The fundamental challenge for New Yorkers is the disconnect between federal and state law. The New York estate tax exemption is currently $6.94 million. While that is a significant sum, it is less than half the federal amount, and many families with real estate and lifelong investments can easily exceed it.
The real danger is what we call the “cliff.” If your taxable estate is 105% of the exemption amount or more, you do not just pay tax on the overage. You pay tax on the entire estate, from the very first dollar. That family with the $7 million estate was not just taxed on the amount over $6.94 million; the state tax was calculated on the full $7 million. This is the mechanism defined in New York Tax Law § 952, and its consequences can be severe for those who fail to plan for it.
Falling off this cliff can mean the difference between a seamless transfer of assets and a forced sale of a family home or business to pay the state. This is not a tax on the wealthy; it is a tax on the unprepared.
Intentional Gifting as Deliberate Stewardship
One of the most effective ways to manage the size of a taxable estate is through lifetime gifting. This is not about hastily writing checks in your final years. It is about a deliberate, multi-year strategy of transferring wealth to the next generation in a controlled and tax-efficient manner.
Each year, you can give a certain amount—the annual gift tax exclusion—to any number of individuals without filing a gift tax return. For a couple with three children and six grandchildren, this can add up to a significant sum removed from their estate annually. For larger gifts, you can use your lifetime gift tax exemption, which is tied to the federal estate tax exemption.
But here again, New York has its own rules. The state has a three-year “clawback” provision. Any taxable gifts made within three years of your passing can be pulled back into your estate for the purpose of calculating the New York estate tax. This means a last-minute gifting plan is often ineffective. Prudent planning requires foresight—a strategy enacted well before it is needed.
The Proper Role of Trusts in Tax Planning
Trusts are not just for managing assets for beneficiaries. They are powerful instruments for reducing estate tax liability. By placing assets into a properly structured irrevocable trust, you legally remove them from your personal ownership. They are no longer part of your estate at your death and are therefore not subject to estate tax.
Consider an Irrevocable Life Insurance Trust (ILIT). Many people buy life insurance to provide their heirs with the liquidity needed to pay estate taxes. However, if you own the policy yourself, the death benefit is included in your taxable estate—paradoxically increasing the very tax it was meant to pay. By placing the policy inside an ILIT, the trust owns the policy. The death benefit is paid to the trust, which can then make the funds available to the estate to pay taxes, all without the proceeds being taxed themselves.
Other trusts, like Grantor-Retained Annuity Trusts (GRATs) or Qualified Personal Residence Trusts (QPRTs), serve similar functions for different types of assets. The goal is always the same: to be intentional about what you own at the time of your death.
Stewardship.
This work is not about avoiding taxes—it is about fulfilling your duty as a custodian of generational assets. It requires a clear-eyed assessment of your assets, an understanding of the law, and a deliberate plan. The alternative is leaving the distribution of your life’s work to a rigid and unforgiving state tax code.
Before you take any other action, the first step is to gain clarity. I recommend that my clients begin by preparing a simple net worth statement—a list of all assets and liabilities. Seeing the numbers on paper is often the catalyst for moving from abstract concern to concrete action.
