A client recently sat in my office and told me about the Brooklyn brownstone his parents bought in 1978. It was their foothold in America, purchased for a price that seems impossibly low today. Now, that same home is worth a few million dollars. Combined with their retirement savings and a small life insurance policy, their estate is suddenly approaching a number that gets the attention of the New York State Department of Taxation and Finance. Their primary concern wasn’t for themselves—it was ensuring the house that anchored their family could pass to their children without a crippling tax bill forcing its sale.
This is a story I hear often. Families build a life, and their home becomes the physical embodiment of that legacy. But many people are surprised to learn that the stewardship of that legacy involves planning for taxes after they’re gone. The conversation often starts with a question about “inheritance tax,” but that’s a common misnomer here.
New York’s Estate Tax: The Real Issue
First, let’s be precise. New York does not have an inheritance tax—a tax paid by the person who receives the property. Instead, New York has an estate tax, which is a tax levied on the total value of the deceased person’s assets before they are distributed to any heirs. The responsibility for payment falls on the estate itself, not the beneficiaries.
Whether your estate will owe this tax depends on its total value. For 2024, the New York State estate tax exemption is $6.94 million. If your net estate is below this amount, you generally will not owe any state estate tax. This is a generous exemption that protects the vast majority of families.
However, New York has a unique and unforgiving feature often called the “tax cliff.” If the value of your estate is more than 105% of the exemption amount, you don’t just pay tax on the overage. You lose the exemption entirely, and the tax is calculated on the entire value of the estate from the very first dollar. This can turn a manageable situation into a significant financial burden, often requiring the sale of illiquid assets—like the family home—to pay the bill.
Gifting the Home: A Strategy with Tradeoffs
Some consider giving the house to their children during their lifetime. This strategy requires deliberate planning and has significant consequences. You can make annual gifts up to a certain amount per person (the federal annual gift tax exclusion) without tax implications. Gifting a house, however, almost always exceeds this amount and requires filing a gift tax return.
More importantly for New Yorkers, the state has a three-year “clawback” rule. If you make a significant gift (like a house) and pass away within three years, New York will pull the value of that gift back into your estate for tax calculation purposes. This rule is designed to prevent last-minute gifting solely to avoid the estate tax.
There’s another major consideration: capital gains tax. When you gift a house, the recipient also receives your original cost basis—what you paid for it plus improvements. If they later sell the house, they will owe capital gains tax on the difference between the sale price and that low original basis. In contrast, property passed down after death receives a “step-up” in basis to its fair market value at the time of death, which can wipe out decades of taxable appreciation.
The Role of Trusts in Protecting Real Estate
For many families, a more prudent path involves the use of trusts. A trust is a legal structure where a trustee—a person or institution bound by the strict fiduciary duty outlined in New York’s Estates, Powers and Trusts Law (EPTL)—holds and manages assets for the benefit of your chosen beneficiaries. When structured correctly, a trust can legally remove the house from your taxable estate.
An Irrevocable Trust is the most common vehicle for this purpose. By transferring the house into an irrevocable trust, you are formally relinquishing ownership. The property now belongs to the trust, and as such, it is generally not counted as part of your estate when you pass away. This can be an incredibly effective way to shield the home from estate taxes.
This strategy is not without its own profound tradeoffs. “Irrevocable” means you cannot easily undo it. You give up a significant degree of control. You can no longer sell the house on your own or take out a mortgage against it. The decision to place a home in an irrevocable trust must be made with a full understanding of what it means for your financial flexibility. It is a powerful tool for generational planning, but it demands careful and intentional thought.
Protecting the family home is about more than minimizing a tax. It’s about ensuring the continuity of a legacy. The law provides tools to accomplish this, but they must be used with precision and foresight.
The first step is not to start drafting documents, but to gain clarity. I advise clients to begin by preparing a simple net worth statement—a confidential list of their assets and liabilities. This provides a clear picture of where they stand relative to the current New York estate tax exemption and forms the foundation for a productive conversation about their goals.
