Most New Yorkers with substantial assets have heard the good news: the federal estate tax exemption is now $15 million per person – a threshold so high that the vast majority of families will never owe a dime in federal estate tax. It’s tempting to read that headline, breathe a sigh of relief, and assume your estate plan is handled.
Here in New York, that assumption can be a very expensive mistake.
New York has its own estate tax, its own far lower exemption, and one particularly unforgiving feature that most other states don’t have: the estate tax cliff. Fall off it by even a dollar, and your family can lose the entire New York exemption and owe hundreds of thousands of dollars in tax that careful planning could have avoided. As a firm led by an attorney who is also a CPA, we see this trap catch well-meaning families every year. Here’s how the cliff works, why 2026 makes it more dangerous rather than less, and what you can do about it.
What Is the New York Estate Tax “Cliff”?
Start with the number that matters most. For 2026, the New York estate tax exemption is $7,350,000 per person. If your taxable estate lands at or below that figure, New York collects nothing.
In most tax systems, going slightly over an exemption means you pay tax only on the amount above the line – a reasonable, proportional result. New York doesn’t work that way. Under state law, once your estate exceeds the exemption by more than 5% (roughly $7,717,500 in 2026) you don’t just lose the exemption on the excess. You lose it on everything. The entire estate becomes taxable from the first dollar, at rates that climb as high as 16%.
That narrow band between the exemption and 105% of it is what planners call the cliff. Inside it, a partial exemption phases out quickly. Just past it, the exemption vanishes entirely. The result is one of the strangest math problems in American tax law: a marginal tax rate that can exceed 100%, meaning a modest increase in your estate can cost your heirs more than the increase itself.
One more New York quirk sharpens the danger. Unlike federal law, New York does not allow spousal portability, meaning a surviving spouse cannot “inherit” a deceased spouse’s unused exemption. For married couples, that means an exemption used carelessly is an exemption lost forever.
A Real-World Example
Imagine two neighbors, each leaving an estate to their children.
The first has a taxable estate of exactly $7,350,000. New York estate tax owed: $0.
The second has an estate of $7,750,000, just $400,000 more, perhaps the difference of a paid-off mortgage or a strong year in the market. Because that estate sits above the 105% cliff, the full exemption disappears and the entire $7,750,000 is taxed. New York estate tax owed: roughly $680,000.
Read that again. An extra $400,000 in assets triggered about $680,000 in tax. The family would have been better off, by hundreds of thousands of dollars, if that second estate had been smaller. This is not a loophole or an exaggeration, it is exactly how the statute operates, and it is why the cliff deserves the attention of anyone whose net worth is anywhere in the $6 million to $15 million range.
Why 2026 Makes This More Dangerous, Not Less
When Congress made the $15 million federal exemption permanent under the 2025 tax law (the One Big Beautiful Bill Act), it removed the “sunset” that planners had been racing against for years. According to the IRS, the exemption is now $15 million per individual for 2026 and will continue to adjust for inflation.
For most of the country, that’s a reason to relax. In New York, it’s a reason to look closer, because it widens the gap between what you owe Washington and what you owe Albany. A married couple in Melville with a $14 million estate now faces zero federal estate tax, thanks to a combined $30 million federal exemption. That same couple, with no additional planning, could hand New York a seven-figure estate tax bill. The federal headline creates a false sense of security precisely for the families the New York cliff hits hardest.
The permanence of the federal law is actually good news for planning: it means you can give away significant wealth during your lifetime without fear that the rules will snap back. The question is no longer whether to plan around the state tax, but how.
How to Keep Your Family Off the Cliff
The encouraging part of this story is that the New York cliff is one of the most avoidable taxes on the books. Because the tax turns on which side of a bright line your estate falls, thoughtful planning can move you to the safe side. A few of the strategies we use most often with clients:
Lifetime Gifting, New York’s Best-Kept Advantage
Here is a fact that surprises many New Yorkers: New York has no gift tax. You can give assets away during your life, reduce the size of your taxable estate, and, unlike residents of the handful of states that tax gifts, pay no state gift tax for doing so.
At the federal level, you can give up to the 2026 annual exclusion of $19,000 per recipient ($38,000 for a married couple splitting gifts) to as many people as you like, every year, without touching your lifetime exemption or filing a gift tax return. A couple with three married children and six grandchildren could move well over $400,000 out of their estate in a single year, and repeat it annually. Over a decade, that alone can be the difference between clearing the cliff and tumbling off it.
One important caution unique to New York: any taxable gifts made within three years of death are “clawed back” into your New York taxable estate. Gifting is powerful, but it rewards those who start early. Waiting until a health scare to give assets away can defeat the entire strategy.
Credit Shelter Trusts for Married Couples
Because New York offers no portability, a married couple has to actively use both of their exemptions, or lose one of them. Here’s the trap: if the first spouse to pass away simply leaves everything to the survivor, that first spouse’s $7.35 million exemption disappears unused, and the entire combined estate is left to clear the cliff on the survivor’s single exemption. A properly drafted credit shelter trust (sometimes called a bypass trust) prevents that. When the first spouse dies, an amount up to their exemption is directed into the trust instead of passing outright to the survivor. The surviving spouse can still benefit from those assets during their lifetime, but because the assets sit in the trust rather than in the survivor’s own name, they aren’t counted in the surviving spouse’s estate at their later death. The practical effect is that the couple shelters two exemptions’ worth of assets rather than one, often preserving millions that would otherwise evaporate. This is core estate planning work, and it lives or dies on the drafting, which is why the wills and trusts at the heart of your plan deserve professional attention.
The Charitable “Santa Clause”
For estates hovering right at the edge, a small, intentional charitable gift can rescue the entire exemption. Because the cliff is triggered by exceeding 105% of the exemption, directing the amount above that threshold to charity, through what practitioners nickname a “Santa Clause” in the will, can pull the taxable estate back under the line. The family gives a modest sum to a cause it cares about and, in doing so, saves a far larger sum in tax. It’s one of the rare planning moves where everyone but the tax collector comes out ahead.
Removing Assets Through Irrevocable Trusts
Larger estates often need to move assets out of the taxable estate entirely. Tools such as irrevocable life insurance trusts (ILITs), spousal lifetime access trusts, and other irrevocable structures can hold life insurance and appreciating assets outside your estate, keeping the death benefit from inflating the very number that determines whether you clear the cliff. These strategies work best when coordinated with your broader income-tax picture, which is exactly where integrated tax planning earns its keep.
The Bottom Line
The New York estate tax cliff punishes families who assumed that a generous federal exemption meant they were safe. The line between owing nothing and owing hundreds of thousands of dollars is razor-thin, unforgiving, and, with the right plan in place well ahead of time, entirely avoidable.
If your estate is anywhere near the $7.35 million New York threshold, the worst thing you can do is nothing. Let’s take a look at where you actually stand and map out a plan to keep your family on the right side of the cliff. Because our firm is led by a New York attorney and a CPA, we can address the estate tax, the gift strategy, and the income tax consequences in one coordinated conversation, rather than sending you to three different professionals who never talk to each other. Reach out to us for a straightforward review of your situation; a short conversation now can save your family a fortune later.
