New York Estate Planning 2026: The $7.35M Exemption, the Cliff Rule, and What Every HNW Family Must Know

New York's estate tax is one of the most aggressive in the country — and one of the most misunderstood. The state exemption is $7,350,000 in 2026, more than $7.6 million below the federal $15M threshold. NY has no portability, so a married couple that doesn't plan around a credit shelter trust loses one spouse's full $7.35M exemption forever. And the notorious "cliff rule" means an estate worth $7.73M can owe nearly $850,000 in state estate tax — while an estate worth $7.71M owes barely $11,000. Understanding these rules is the difference between a six-figure inheritance and a six-figure state tax bill.

How New York estate tax works

New York imposes its own estate tax — Form ET-706 — on the estates of New York residents (and on NY-situs property owned by non-residents). The tax is calculated on the entire NY taxable estate using a graduated rate schedule, then offset by the applicable credit amount.¹

For estates below the $7.35M exemption: no NY estate tax is owed. For estates above the exemption: the cliff rule determines whether the tax is calculated on the excess only or on the full estate. See below.

The New York cliff rule — the most dangerous provision in state estate tax law

New York's cliff rule is unusually punitive. When an estate exceeds 105% of the basic exclusion amount — the cliff threshold — the estate loses its exemption entirely and is taxed on every dollar from zero. The result is a tax bill that can jump by $840,000 or more when an estate crosses the threshold by as little as $10,000.

How it works

• Below the exemption ($7,350,000): Zero NY estate tax.
• In the buffer zone ($7,350,001 – $7,717,499): NY tax is calculated only on the excess over the exemption. A $7.5M estate pays tax on $150,000. Effective NY tax: modest (a few thousand to ~$30,000).
• At or above the cliff ($7,717,500+): The exemption credit is phased out entirely. NY tax is calculated on the full value of the estate — from the first dollar. A $7.73M estate pays tax on all $7.73M.

Tax amounts are illustrative using the NY rate schedule above; actual liability is calculated per the ET-706 worksheet and the NY basic exclusion credit. NY Department of Taxation publishes the current ET-706 form and instructions annually.

New York estate tax vs. federal: six critical differences

The portability gap — why NY married couples must use credit shelter trusts

The federal estate tax allows "portability" — when one spouse dies, the surviving spouse can elect to use the deceased spouse's unused exemption amount (DSUE). A married couple with a combined estate under $30M can pass everything to the surviving spouse and use the DSUE at the second death to get a combined $30M federal exemption.

New York does not allow portability. If a NY married couple does nothing and the first spouse leaves everything to the surviving spouse (claiming the unlimited marital deduction), the surviving spouse has only their own $7.35M exemption at death. The first spouse's $7.35M NY exemption is gone — wasted.

For a married couple with a $14M combined estate, the math is stark:

The credit shelter trust (also called a bypass trust or "B trust") works by transferring assets equal to the first spouse's NY exemption into an irrevocable trust at death. The trust is not part of the surviving spouse's taxable estate. The surviving spouse can receive income from the trust, and potentially principal under a HEMS standard, without the trust being "owned" by the surviving spouse for estate tax purposes. See the QTIP trust guide for a variation that provides even greater spousal income protection while still sheltering the first spouse's exemption.

NY estate tax for estates above $7.35M: the planning strategies

1. Annual gifting — no NY lookback after 2018

New York's 3-year gift lookback rule — which added gifts made between April 1, 2014 and December 31, 2018 back to the NY gross estate — expired. Gifts made after January 1, 2019 are not included in the NY gross estate.² This makes annual gifting the simplest and most accessible strategy for NY residents in the $7.35M–$15M range.

The 2026 annual gift exclusion is $19,000 per donor per recipient ($38,000 per married couple). A couple with two adult children and four grandchildren can transfer $228,000 per year with no gift tax, no Form 709 required, and no reduction in the NY gross estate at death. Over 10 years: $2.28M removed from the NY taxable estate — worth up to $364,800 in NY estate tax savings at the 16% top rate.

Strategies within the annual exclusion:

• 529 superfunding: $95,000 per beneficiary ($190,000 per couple) in a single year using the 5-year election. Gifts leave the estate immediately and grow tax-free for college. See the grandchildren planning guide.
• IRC §2503(e) direct tuition and medical payments: Unlimited — payments made directly to educational institutions or medical providers don't count against the annual exclusion and aren't gifts at all. A grandparent paying $80,000/year in private college tuition directly to the university removes $80,000 from the estate with zero gift tax consequence.
• Crummey gifts to irrevocable trusts (ILIT): Annual exclusion gifts to an ILIT fund premium payments on life insurance outside the taxable estate. Each beneficiary's present-interest withdrawal right (Crummey notice) preserves the annual exclusion for ILIT contributions.

2. Irrevocable trusts: SLAT, GRAT, IDGT

For families with estates well above $7.35M, the annual exclusion alone may not move the needle fast enough. Irrevocable trust strategies move larger amounts outside the NY taxable estate:

• SLAT (Spousal Lifetime Access Trust): Transfers $5M–$15M in assets to an irrevocable trust for the benefit of the non-donor spouse. Assets and all future appreciation leave both the federal and NY taxable estate. The donor spouse retains indirect access through distributions to the beneficiary spouse. At a $10M estate above the federal threshold, the NY and federal tax savings combined can exceed $2M.
• GRAT (Grantor Retained Annuity Trust): Transfers future appreciation above the §7520 hurdle rate (5.00% in 2026) to heirs with minimal gift tax cost. A zeroed-out GRAT uses all gift-tax exemption on the retained annuity value, so the "gift" to heirs is effectively zero. Particularly effective for pre-liquidity business interests, concentrated stock, or rapidly appreciating real estate in NY estates.
• IDGT (Intentionally Defective Grantor Trust) installment sale: Sell an appreciating asset to an irrevocable trust at the AFR rate (4.08% mid-term in May 2026). No capital gains on the sale (Rev. Rul. 85-13), all future appreciation leaves the estate, and the income tax payments by the grantor are not additional gifts. Effective for business interests, real estate portfolios, or concentrated equity that is expected to grow substantially.

3. Irrevocable life insurance trust (ILIT)

A survivorship life insurance policy (second-to-die) held in an ILIT pays the death benefit outside the taxable estate of both spouses. For a NY couple facing a $1M+ state estate tax bill, a $1.5M–$2M survivorship policy funded with Crummey annual exclusion gifts can offset the NY tax entirely — while keeping the death benefit out of both spouses' taxable estates. The policy is funded with dollars that would otherwise be consumed by estate tax, effectively converting a tax liability into a transferable asset.

4. Charitable strategies

Charitable giving reduces the NY taxable estate dollar-for-dollar:

• Charitable bequest: Leaving assets to a qualified charity (or donor-advised fund) at death reduces the NY gross estate. A $500K bequest in a will or trust reduces a $7.9M estate to $7.4M — moving it from above the cliff to safely in the buffer zone.
• Charitable remainder trust (CRT/CRUT): Transfer appreciated assets to a CRT, receive an income stream for life, eliminate capital gains inside the trust, and reduce the NY taxable estate. The remainder goes to charity at death.
• Charitable lead annuity trust (CLAT): If the portfolio beats the §7520 5.00% hurdle rate, a zeroed-out CLAT transfers the excess return to heirs tax-free while generating years of charitable distributions that reduce income tax.

5. Relocation to a no-estate-tax state

New York has no reciprocal agreement with any other state — domicile in another state completely severs NY estate tax exposure on non-NY assets. Moving to Florida, Texas, Nevada, Wyoming, Colorado, or another state with no estate tax eliminates the NY tax on the entire non-NY estate.

What remains taxable in NY even after relocation: New York-situs real property (see below). A former NY resident who moves to Florida but retains a Manhattan apartment or Long Island vacation home continues to owe NY estate tax on those properties at the NY rates — and those properties are subject to the cliff rule as well.

Non-residents: NY taxes NY-situs property

New York estate tax is not limited to NY residents. A non-resident who dies owning real property in New York — co-ops, condominiums, commercial buildings, vacation homes, or land — owes NY estate tax on the value of that NY-situs property.³

How it works:

1. NY determines the "NY gross estate" — the fair market value of NY real property (and NY-situs tangible personal property) at death.
2. The NY estate tax is calculated proportionally: (NY gross estate / Federal gross estate) × tentative NY tax.
3. The NY exemption applies pro-rata — not as a flat deduction. For a non-resident with $2M in NY real estate and $10M in out-of-state assets, the NY estate tax is proportional to the NY fraction of the total estate.

Co-ops are treated as NY real property for this purpose (a co-op share is real property under NY law). A $3M Manhattan apartment owned by a Florida-domiciled taxpayer at death still generates a NY estate tax liability. Planning options: sell the property before death and hold cash or securities instead (no NY situs); gift the property during life (post-2019, not added back to NY estate); transfer to an LLC and hold the LLC as personal property (though NY may look through the LLC for situs purposes depending on the specific facts).

Case study: $14M married couple in New York City

Background: Robert and Susan, ages 68 and 65, live in New York City. Combined estate: $14M — $4M apartment, $6M investment portfolio, $2M deferred compensation/IRA, $2M life insurance (in their personal names). No estate planning done beyond a basic will drafted 10 years ago.

Problem 1 — Federal portability works, NY portability doesn't: Under current law, they would owe no federal estate tax (combined $30M federal exemption via portability exceeds their $14M estate). But NY gives them only one $7.35M exemption. If Robert dies first and leaves everything to Susan, she inherits $14M but has only a $7.35M NY exemption. At her death, NY taxes the remaining $6.65M — roughly $940,000+ in NY estate tax.

Solution — Credit shelter trust: Robert's will is amended to create a credit shelter trust of $7.35M at his death for Susan's benefit (income for life, principal under HEMS). His remaining $6.65M passes outright to Susan. At Robert's death: zero NY tax (credit shelter trust uses his exemption; outright marital transfer uses marital deduction). At Susan's death: she has $6.65M — below her $7.35M NY exemption — zero NY estate tax. Total NY estate tax: $0 vs ~$940,000 without the credit shelter trust.

Problem 2 — Life insurance in personal names: The $2M life insurance policy is owned personally. Under IRC §2042, personally owned life insurance is included in the taxable estate. Moving it to an ILIT removes it from the NY estate — reducing the overall estate below or further from the cliff threshold, and providing estate liquidity outside the taxable estate.

Problem 3 — NYC apartment NY situs: Even if Robert and Susan eventually move to Florida, the $4M apartment remains NY-situs property subject to NY estate tax. At $4M, the apartment is below the NY exemption on its own — but it combines with all other NY-situs assets. Planning options: sell before death (step-up basis at death eliminates cap gains anyway, but only if they hold until death); gift during life to reduce the NY gross estate; hold in an LLC (though NY look-through rules may apply).

Annual gifting plan: Starting today, Robert and Susan give $38,000/year each to their two adult children and two grandchildren = $152,000/year total. Over 10 years: $1.52M removed from the estate, worth approximately $243,200 in NY estate tax savings at the 16% rate — just from annual exclusion gifting.

Seven New York estate planning mistakes that cost families millions

1. Leaving everything to the surviving spouse without a credit shelter trust. The unlimited marital deduction avoids NY tax at the first death — but it forfeits the first spouse's $7.35M NY exemption. For a couple with $10M–$20M, this is a six-figure to seven-figure mistake. Credit shelter trusts are now routinely drafted into NY married couples' estate plans for exactly this reason.
2. Not updating an estate plan written before 2019. Plans drafted before 2019 may rely on the 3-year gift lookback rule (since expired) or assume a lower exemption amount. The 2026 exemption ($7.35M) is significantly higher than it was in 2018 ($5.25M), which may mean existing credit shelter trust funding formulas capture more assets than intended — or more than is optimal under current law.
3. Assuming federal portability fixes the NY problem. Federal portability is real, powerful, and should always be claimed by filing Form 706 — see the portability election guide. But it has no effect on the NY estate tax. NY does not recognize DSUE. A surviving spouse who relies on portability for the federal tax still has only a $7.35M NY exemption at death.
4. Keeping NY real property after relocating to Florida or another state. A Florida domiciliary who retains a NY apartment or vacation home still owes NY estate tax on that property's value at death. If the cliff rule applies to the NY portion (assessed proportionally), the bite is significant. Selling NY real property before death — and holding securities instead — eliminates the NY situs exposure entirely.
5. Allowing the estate to land in the $7.35M–$7.72M danger zone without planning. If the current estate is $7.5M, a few targeted gifts of $200,000+ (through annual exclusions, direct tuition payments, or other strategies) can move the estate below $7.35M and eliminate NY estate tax entirely. Estates in the danger zone should be a planning priority — the tax savings per dollar spent on planning are extraordinarily high.
6. Missing the Form ET-706 filing deadline. NY Form ET-706 is due within 9 months of the date of death (Form ET-417 extends this by 6 months for estates needing more time). Late filing can result in interest and penalties — and the credit shelter trust election may not be available retroactively if the plan was not properly documented in the governing trust instrument before death.
7. Not considering the NY estate tax in SLAT/GRAT design. Federal irrevocable trust strategies are primarily designed around the $15M federal exemption. But NY residents need to ensure the trust design and funding amounts also account for the $7.35M NY exemption. A dual-SLAT strategy funded with $15M per spouse (using the full federal exemption) is excellent federal planning — but may still leave the donor spouses with NY taxable estates that exceed the cliff if other assets are retained.