Record-high 2026 Federal Tax Exemptions Expand Opportunities For New Yorkers To Permanently Reduce Future New York Estate Tax

The federal gift and estate tax exclusions and the generation-skipping transfer (GST) tax exemption increased significantly under the One Big Beautiful Bill Act (OBBBA) passed in 2025. Beginning in 2026, the new greatly expanded exclusion amounts took effect, providing extraordinary multigenerational estate planning opportunities.

For New York residents, stock market volatility, depressed values for asset classes such as residential and commercial real estate, and the record-high federal exemption amounts open the door for powerful gifting opportunities. Advanced planning is crucial to avoid triggering the New York estate tax “cliff.”

In Depth

How the exclusions impact New York residents

New York state enacted legislation in 2014 reforming its estate tax laws. One of its major changes was the gradual increase of the New York state estate tax exclusion from $1,000,000 to the federal level, anchored, however, to the exclusions provided under then-existing federal tax law. As of January 1, 2026, the New York state estate tax exclusion amount increased from $7,160,000 to $7,350,000. It is indexed for inflation, with 2010 as the base year for this purpose. Although New York does not have a gift tax, gifts (other than annual exclusions gifts) made within three years of one's death are “clawed back” and included in the New York state estate tax computation.

To take advantage of the increased federal exclusion amounts, New Yorkers should plan to maximize both spouses' New York exclusion amounts. Unlike federal law, the state does not recognize the portability of a deceased spouse's unused exclusion amount to the surviving spouse. As a result, many New Yorkers will continue to incorporate credit shelter trusts or disclaimer trusts in their wills to maximize the benefits of both the New York and federal law exclusion and exemption amounts. This means that, without proper planning, at the death of a first spouse, the current New York exemption of $7,350,000 would be wasted if not used on the first spouse's death. With proper planning, on the death of the first spouse, certain trusts could be funded to secure the use of the New York estate tax exemption and preserve the assets free of New York and federal estate tax on the death of the first spouse.

Avoiding the New York estate tax cliff

The doubling of the federal estate tax exclusion under the Tax Cuts and Jobs Act of 2017 and the most recent increase under the OBBBA have created a $7,650,000 spread between the federal and New York state estate tax exclusion amounts. The benefits of an increased New York estate tax exclusion amount are effectively denied to wealthier New Yorkers because a “cliff” is built into the New York estate tax calculation that quickly phases out all benefits of the exclusion if the decedent's New York taxable estate is between 100% and 105% of the exclusion amount available on the date of death. The cliff completely wipes out the benefits of the exclusion if the decedent's New York taxable estate exceeds 105% of the exclusion amount available on the date of death.

To avoid exceeding the New York estate tax exclusion and falling into the “cliff” range, New Yorkers should gift sooner rather than later and consider implementing the following strategies:

• New York residents can make lifetime gifts within the parameters of the expanded federal exclusion (currently $15,000,000) and permanently move assets out of the New York taxable estate without incurring any state-level gift tax. Because New York has no gift tax (although a three-year add-back applies), residents can permanently insulate gifted property from New York estate tax and may have the added benefit of reducing their New York taxable estates below the applicable exclusion amount on the date of their death. For some, this can help avoid the confiscatory impact of the New York estate tax cliff.
  • For example, a gift of $15,000,000 by a New York resident can potentially save, at least, between $1,866,800 and $2,400,000 of New York state estate tax (depending on the total size of the taxable estate). The New York estate tax savings could potentially be doubled if both spouses were to fully use their federal exclusions by making lifetime gifts.
• New Yorkers whose estates are within the 100% to 105% “cliff” range ($7,350,000 to $7,717,500) or whose estates only slightly exceed the New York estate tax exclusion amount may consider gifting an amount that would bring their taxable estate below the New York estate tax exclusion amount.
  • For example, a New Yorker who has assets with a current value of $7,717,500 and is in relatively good health may wish to consider gifting $400,000 at this time to their children or other intended beneficiaries. Considering the three-year clawback, it would be advantageous to make such a gift as soon as possible or to make gifts of that amount in a manner that qualifies for the annual gift tax exclusion. Suppose this person is married and has four children and eight grandchildren. If they make annual exclusion gifts of $19,000 to each child and grandchild (either outright or in a sprinkle trust) with each child and grandchild having temporary withdrawal rights, and if the person's spouse is willing to split the gifts, then up to $456,000 (or the entire $400,000 in this example) would be treated as annual exclusion gifts that are not subject to the clawback.

As always, the potential estate, gift, and GST tax savings should be weighed against the potential cost of the loss of the step-up of income tax basis for assets included in a decedent's taxable estate under current law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.