Estate tax. In the simplest of terms, it’s a federal tax on the transfer of the estate of a person who dies. New York has its own estate tax, separate from the federal estate tax, which is an additional tax on top, with an exemption of $7.16 million in 2025.
While it seems straightforward, one of the most misunderstood features of New York law is the New York Estate Tax Cliff.
What Is the New York Estate Tax Cliff?
If an estate exceeds the state exemption by more than 105%, the entire exemption can be lost and taxes will need to be paid on the full amount of the estate, not just the excess.
Estates can be pushed over the threshold for various reasons, such as appreciation in real estate, life insurance, or retirement accounts that have grown significantly. The “cliff” is usually uncovered due to hidden assets and poor planning.
What does this mean for an heir?
If estate taxes are too much for an heir to pay, they may need to quickly sell the assets. And if they choose to keep the assets, they face a very large and unexpected bill.
For high-wealth families with sizable assets, proper planning and conversations around taxes and potential outcomes for their heirs is vital.
How can estate planning help?
One strategy is using an Irrevocable Trust, which we have covered in some of our previous newsletters. When you transfer assets into the trust, they are removed from your taxable estate.
Another option is something called “lifetime giving.” Making annual gifts to family and friends is not subject to New York estate tax, but you do have to consider the 3-Year Rule (Clawback). If you die within three years of making a large gift, New York brings that gift back into your taxable estate.
Charitable giving is another way to donate assets, because they are fully deductible. You can put a charitable bequest clause in your will or trust, which is a provision that directs a specific gift to a qualified nonprofit organization upon your death.
Couples may choose to keep assets separate in revocable trusts, so each person can utilize individual exemptions. New York does not have portability between spouses, which is a federal tax rule allowing a surviving spouse to inherit and use the unused estate and gift tax exemption of their deceased spouse.
Reviewing your plan often, especially as assets grow or laws change, ensures you eliminate unnecessary tax consequences.
This can be a confusing and complex situation to navigate, and at Sugarman Law, we are happy to walk you through the process. If you would like to chat more about the New York Estate Tax Cliff, or estate planning in general, give us a call.
