Introduction

As of Jan. 1, 2026, the New York State estate tax continues to present distinctive estate planning challenges attributable to differences between the New York and federal estate tax regimes. This article provides a comprehensive overview of the current New York estate tax framework, including a discussion and analysis of the New York estate tax exemption amount, key computational differences between the New York and federal estate tax, and practical planning strategies to minimize state and federal estate tax exposure for New York State residents dying in or after 2026.

2026 Federal and New York Estate Tax Exemptions 

For US citizens and residents dying in 2026, the federal unified estate and gift tax exemption is $15,000,000 per individual. This amount, which also applies to the federal lifetime gift tax exemption, was established under the One Big Beautiful Bill Act(OBBBA) and made permanent beginning Jan. 1, 2026.¹

The New York estate tax exemption is $7,350,000 for New York State residents dying on or after Jan. 1, 2026.² Unlike the federal regime, New York does not allow portability of the unused exemption between spouses.³

Determining the New York Taxable Estate

For New York residents, the calculation of the taxable estate for state estate tax purposes generally begins with the federal gross estate—the value of all assets owned at death—before taking into account various state-specific adjustments, such as the inclusion of taxable gifts made within three years of the decedent’s death.⁴ Assets included in the federal gross estate under IRC sections 2031 and 2033 are also included for New York purposes, subject to certain modifications.

For example, New York excludes real property and tangible personal property located outside New York State from the New York gross estate, a significant departure from the federal worldwide inclusion rule.⁵ The New York gross estate is then reduced by the value of New York’s allowable deductions to arrive at the New York taxable estate.⁶

New York Estate Taxation of Non-Residents

Non-residents of New York are subject to New York estate tax only if they own real estate or tangible personal property located within the state at death.⁷

Federal Estate Tax Calculation

The federal estate tax calculation begins with the gross estate, adds adjusted lifetime taxable gifts, and subtracts allowable deductions such as the marital and administration expense deductions and the deduction for state estate taxes. Any amount of the federal taxable estate exceeding the $15,000,000 exemption is subject to federal estate tax at a 40% rate.

The New York Estate Tax and the New York “Cliff Tax”

The New York estate tax does not apply to taxable estates beneath a certain exemption level. When an estate is above the exemption level, the New York estate tax is imposed pursuant to a graduated rate schedule. However, New York applies a “Cliff Tax” mechanism in calculating the New York estate tax. If the New York taxable estate exceeds 105% of the New York exclusion amount, the entire estate becomes taxable from dollar one rather than just the excess over the New York exemption. ⁸

For 2026:

• New York exemption: $7,350,000
• Cliff Tax threshold (105% of the New York exemption): $7,717,500

Once a New York taxable estate exceeds $7,717,500, the Cliff Tax rule applies in full and eliminates the benefit of the $7,350,000 exemption entirely, subjecting the full taxable estate to state tax according to graduated rates.

If the New York taxable estate is between the $7,350,000 exemption amount and the maximum Cliff Tax amount, then part of the exemption is lost, and estate tax will be due. Although the New York estate tax for estates that fall within this “Cliff” range is still calculated at marginal rates, due to the loss of part of the exemption, a New York estate that is slightly above the exemption amount but less than the maximum Cliff Tax amount can be subject to New York estate tax at a marginal tax rate exceeding 100% when one measures the New York estate tax against the amount of the taxable estate in excess of the exemption amount. 

The calculations below are based on the New York State 2025 estate tax return, as the New York State 2026 tax form has not been released as of this writing.

Examples:

Assume a New York resident dies in 2026 with a New York taxable estate of $7,500,000, just $150,000 above the $7,350,000 exemption. Because the estate falls within the Cliff range, a portion of the exemption is phased out, resulting in a New York estate tax of approximately $386,000. When measured against the $150,000 excess over the exemption, this produces an effective marginal tax rate on the excess of approximately 257%.

Assume a New York resident dies in 2026 with a New York taxable estate of $7,800,000, exceeding 105% of the $7,350,000 New York estate tax exclusion amount. Because the estate exceeds the Cliff Tax threshold of $7,717,500, the Cliff Tax applies in full, and the entire $7,800,000 estate becomes subject to New York estate tax. The resulting New York estate tax is approximately $746,000. When measured against the $450,000 amount by which the estate exceeds the exemption, this produces an effective marginal New York estate tax rate on the excess of approximately 165.7%, illustrating the punitive nature of the Cliff Tax.

Charitable Bequests and the “Santa Clause”

To mitigate the adverse effects of the Cliff Tax where the value of a New York taxable estate is expected to fall within the Cliff range, some trusts and estates attorneys have suggested that their clients include a formula charitable bequest to charity in the clients’ wills or revocable trusts. Such a bequest is often referred to as a “Santa Clause.” In such situations, the will or revocable trust directs that an amount equal to the excess of the taxable estate over the New York exclusion amount be given to charity, thereby reducing the taxable estate to the exclusion amount and eliminating the otherwise applicable New York estate tax liability.

This estate planning technique can be effective, but care is required when non-probate assets (e.g., IRAs, retirement plans, annuities) constitute a significant portion of the gross estate and where such assets have different beneficiaries than those of the will or revocable trust.

Example:

Assume a New York resident dies in 2026 with a New York taxable estate of $7,450,000, exceeding the $7,350,000 New York estate tax exclusion amount by $100,000, but remaining below 105% of the exclusion amount ($7,717,500). Absent planning, the estate would fall within the Cliff range, resulting in a partial phase-out of the exclusion and a New York estate tax liability of approximately $265,000, based on the statutory phase-out formula and graduated rate schedule.

Now assume the decedent’s will includes a formula Santa Clause charitable bequest directing that an amount equal to the excess of the New York taxable estate over the New York exclusion amount be distributed to a qualified charity. Under this provision, $100,000 is paid to charity, reducing the New York taxable estate to exactly $7,350,000. Because the taxable estate is reduced to the exclusion amount, no New York estate tax is due. The Santa Clause eliminates the otherwise applicable New York estate tax in its entirety and produces a New York estate tax savings of approximately $265,000, while leaving the non-charitable beneficiaries economically better off than if no charitable formula had been included.

Lifetime Gifting Strategies

Annual exclusion gifts remain a core tool in estate tax planning. For 2026, the federal annual exclusion remains at $19,000 per recipient per year, allowing individuals to reduce their taxable estates by significant amounts without gift tax consequences.⁹

In addition, direct payments of tuition and medical expenses to qualifying institutions or providers do not count against the annual exclusion or the lifetime gift tax exemption.¹⁰

New York does not have a state gift tax but instead imposes a three-year “claw-back” of taxable gifts made within three years of death. Such gifts are included in the taxable estate for New York purposes to prevent deathbed depletion of assets to reduce New York estate tax.¹¹

Irrevocable Trusts and SLATs

Irrevocable trusts continue to be a mainstay of both federal and New York estate tax planning. Properly drafted and funded irrevocable trusts can remove assets from the grantor’s estate for estate tax purposes, provided the grantor retains no prohibited interests in the irrevocable trust. Prohibited interests include the ability to control the trust as trustee, the ability to revoke or amend the trust, and the ability to receive income and/or principal from the trust as a trust beneficiary.¹²

A Spousal Lifetime Access Trust (SLAT) allows the grantor’s spouse (but not the grantor) to benefit from assets transferred by the grantor to an irrevocable trust. Thus, the transferred assets are indirectly available to the grantor during the grantor’s spouse’s lifetime. Such trusts work effectively for both federal and New York purposes. Due to the unified federal gift and estate tax credit, although the transferred assets are removed from the grantor’s estate for federal estate tax purposes, the grantor’s unified credit is correspondingly reduced. Thus, the estate tax savings benefit for federal purposes is that all post-transfer appreciation in the transferred assets is removed from the grantor’s estate for federal estate tax purposes. A SLAT can be even more effective for New York estate tax purposes. For New York purposes, provided the donor survives three years after the funding of the SLAT, all the trust assets, the principal value of the assets transferred, plus the appreciation in value of such assets, are excluded from the estate for New York estate tax purposes.

Planning for Married Couples: Credit Shelter Trusts

Federal tax law allows a surviving spouse to inherit the unused portion of their deceased spouse’s estate tax exemption (i.e., estate tax exemption portability). Because New York does not allow estate tax exemption portability, credit shelter trusts are often used to preserve both spouses’ exemptions. Such trusts are set up in the wills or revocable trusts of a married couple.  Typically, the will or revocable trust will direct that assets equal in value to the New York exemption amount in effect at the first spouse’s death will pass into a trust (the credit shelter trust) for the survivor, thereby shielding that amount from both federal and New York estate tax at the death of the surviving spouse, while still allowing the surviving spouse to have lifetime access to such assets.

Other Planning Techniques

• Irrevocable Life Insurance Trusts (ILITs): Life insurance held in an ILIT is generally excluded from the insured’s estate. If a client transfers an existing policy into an ILIT, the client must survive at least three years after the transfer to achieve this result. In contrast, if the ILIT acquires a newly issued policy on the insured’s life, the three-year look-back rule does not apply.¹³
• Valuation Discounts: If a client owns non-controlling interests in real estate or a closely held business, the value of the client’s minority interests may be eligible for valuation discounts for estate tax purposes.¹⁴ However, ensuring that an estate will be entitled to such discounts requires qualified appraisals and defensible valuation analyses.

Filing Requirements and Deadlines

Estates with a New York taxable estate over $7,350,000 must file New York Form ET-706. The return and tax are due nine months after the date of death, with an optional six-month filing extension.¹⁵ Payment extensions are not routinely granted and are available only under limited circumstances.

Recent Legislation

The New York claw-back for estate tax purposes of gifts made within three years of death was originally intended to sunset on Jan. 1, 2026. However, under current law, the three-year gift claw-back remains effective in 2026. As part of the 2025–26 New York State budget legislation, the New York Legislature and governor included language extending this rule beyond 2026: the three-year gift add-back has been extended as part of the fiscal plan through at least Jan. 1, 2032. Concurrent budget bill provisions (Part T) also remove the sunset clause entirely, thereby making the three-year gift add-back rule permanent in New York tax law.¹⁶

In addition, the enacted legislative language and committee modifications include provisions that would treat the incremental New York estate tax attributable to such clawed-back gifts as an obligation of the decedent as of death for purposes of determining deductibility on the federal estate tax return under IRC section 2053. If the IRS accepts this characterization, estates taxable at the federal level could claim a federal estate tax deduction for the New York estate tax attributable to the clawed-back gifts—a departure from the rule under which New York estate tax on amounts artificially added back was generally not deductible under federal law because those assets were not included in the federal gross estate. It remains to be seen whether the IRS will accept this classification.

Conclusion

While the 2026 federal landscape provides a significant estate and gift tax exemption of $15,000,000 per individual, New York State’s lower exemption and its punitive Cliff Tax regime require thoughtful estate planning tailored to the interaction of federal and state estate tax rules. Through a combination of lifetime gifting, trust planning, and, where applicable, utilization of valuation discounts—and coordinated federal and state filings—advisers can help clients manage and minimize the impact of estate taxation in 2026 and beyond.

Mr. Snow acknowledges the assistance of his colleague, Paul C. de Freitas, in the preparation of this article.

Footnotes

2. N.Y. Tax Law § 952(c)(1).
3. Compare IRC § 2010(c)(5) with TSB-M-14(6)M.
4. N.Y. Tax Law § 954(a).
5. N.Y. Tax Law § 954(a)(1).
6. N.Y. Tax Law §955.
7.  N.Y. Tax Law § 960.
8. N.Y. Tax Law § 952(c)(1).
9.  IRC § 2503(b).
10. IRC § 2503(e).
11. N.Y. Tax Law § 954(a)(3).
12. IRC §§ 2036–2038.
13. IRC §§ 2035 and 2042.
14. Treasury Regulations §§ 20.2031-1 and 20.2031-2.
15. N.Y. Tax Law § 971.
16. N.Y. FY 2026 Executive Budget, Revenue Article VII.