A son calls me from Brooklyn. His mother, a widow, still lives in the brownstone she and his father bought for a pittance in the 1970s. It’s now the most valuable asset the family has. His question is simple: “How do we make sure the house goes to me and my sister without a huge tax bill wiping out its value?” It’s a prudent question, and one we address for families across New York every week. The answer isn’t about a single tax—it’s about understanding how estate tax and capital gains tax interact.
First, It’s an Estate Tax, Not an Inheritance Tax
New York does not have an “inheritance tax,” which is paid by the person receiving property. Instead, New York has an “estate tax,” paid by the deceased person’s estate before any assets are distributed. This is a critical distinction.
For 2024, the New York State estate tax exemption is $6.94 million. If a person’s total estate is below this amount, no state estate tax is owed. New York, however, has a “cliff.” If the estate’s value is more than 105% of the exemption, the entire estate becomes taxable, not just the amount over the exemption. This creates a sudden and significant tax liability for estates just over the threshold.
For many families, the long-held family home is the asset that pushes the estate’s value over that limit. A deliberate plan for the property is not just a good idea—it’s a core component of responsible stewardship.
The Critical Advantage of a “Step-Up in Basis”
Parents often think the simplest approach is to gift their house to their children while they are still alive. From a tax perspective, this is almost always a mistake. When you gift a property, the recipient also receives your original cost basis—what you paid for the house, plus improvements. If your parents bought their home decades ago, that basis is likely very low. When the children later sell the house, they will owe capital gains tax on the difference between the sale price and that low original basis.
Inheriting the property provides a powerful advantage. Upon death, the asset receives a “step-up in basis” to its fair market value on the date of death. If the children sell the house shortly after inheriting it, there is little to no capital gain, and therefore, little to no capital gains tax. Preserving this step-up is often the most significant tax-saving tool available for a family’s primary residence.
The goal is to structure the transfer so the estate stays under the NY estate tax exemption while ensuring the children receive that crucial step-up in basis. It is a delicate balance.
How Trusts Provide Control and Tax Efficiency
Trusts are the essential instruments for this planning. A trust is not just a document; it’s a legal structure that holds assets for the benefit of others. The rules governing them are codified in Article 7 of New York’s Estates, Powers and Trusts Law (EPTL), providing a clear framework for their operation.
For many families, a Revocable Living Trust is a foundational tool. The parents can transfer the house into the trust, continue to live in it, and manage it as they see fit. They retain full control. Because the trust is revocable, the house remains part of their estate for tax purposes, which means the children receive the step-up in basis upon their parents’ death. The primary benefit here is that assets held in the trust avoid the time and expense of the Surrogate’s Court probate process.
For estates approaching or exceeding the exemption, we might consider more advanced strategies, such as an Irrevocable Trust. A Qualified Personal Residence Trust (QPRT), for example, allows a parent to transfer the home to a trust for a set number of years, removing its future appreciation from their taxable estate. These are complex instruments and are not right for everyone—they require giving up a degree of control. The decision to use one must be made with a full understanding of the family’s goals and the trade-offs involved.
The right approach depends entirely on the family’s specific circumstances—the value of the home, the size of the total estate, and the parents’ long-term wishes. There is no one-size-fits-all answer, only a deliberate process of planning for a predictable outcome.
If you are beginning to consider how your family’s property will pass to the next generation, a productive first step is to inventory the major assets and their approximate values. With that information, you can schedule a consultation to review your family’s potential exposure to the New York estate tax and map out a clear path forward.
