If you live in New York, you could owe estate tax even if your assets fall well below the federal limit. The NY estate tax exemption 2026 is shaping up to be one of the most important financial topics for New York families in the coming years. With the federal exemption set to drop in 2026 and New York maintaining its own rules—including the infamous “cliff” that can erase your exemption entirely—planning now can save your loved ones millions later.
This guide is for New York professionals, families, and property owners who want to understand what’s changing, how federal and state laws interact, and what steps to take before the rules shift. You’ll walk away with a clear understanding of what’s at stake—and how to prepare your estate plan accordingly.
How Do New York and Federal Estate Tax Exemptions Differ?
Many families assume they’re safe from estate tax because their wealth falls below the federal threshold. Unfortunately, that’s not always true in New York.
Federal Estate Tax (2025):
- Exemption: $13.61 million per individual ($27.22 million for married couples)
- Tax rate: 40% on taxable amounts above the exemption
- Portability: Surviving spouses can inherit unused exemption amounts from the deceased spouse
New York Estate Tax (2025 projection):
- Exemption: Around $6.94 million per person, adjusted yearly for inflation
- No portability: New York doesn’t allow a surviving spouse to use any remaining exemption from the first spouse
- “Cliff” rule: If your taxable estate exceeds 105% of the state exemption (roughly $7.287 million), you lose the exemption entirely—making your entire estate taxable
The takeaway?
You can be well below the federal limit and still owe significant state estate tax. For example, a Brooklyn brownstone worth $4 million, combined with retirement accounts and life insurance, could easily push an estate over the New York threshold.
If you haven’t reviewed your estate plan since moving to New York or acquiring real estate, you may also want to read “Reasons to Avoid Probate” to understand how New York law can compound estate challenges.
What Will Change When the Federal Exemption Sunsets in 2026?
The 2017 Tax Cuts and Jobs Act temporarily doubled the federal estate tax exemption—but only through 2025. Unless Congress acts, the exemption will revert to about half its current level in 2026, estimated around $6.8 million per person.
Here’s what that means for New Yorkers:
- More Families Affected. The federal exemption will align closely with New York’s, pushing many previously untaxed estates—especially those with appreciated real estate or business assets—into taxable territory.
- New York Adjustments Won’t Keep Pace. While New York’s exemption increases slightly each year with inflation, the adjustments are modest. They won’t offset the federal rollback.
- Real Estate Appreciation Adds Pressure. Property values in New York City and the Hudson Valley continue to rise. A home purchased decades ago could now be worth several million dollars, creating taxable exposure even for families who don’t consider themselves “wealthy.”
In short, without proactive planning, many middle- and upper-middle-class families could suddenly face estate tax liability beginning in 2026.
What Steps Can You Take Now to Reduce Future Estate Taxes?
Estate planning strategies that take advantage of today’s higher exemption levels can create lasting benefits. The key is to act before the sunset in 2026.
1. Use the Federal Exemption Before It Shrinks
The IRS has confirmed there will be no “clawback” for gifts made under the current exemption. In other words, if you gift or transfer assets now, those transfers will remain tax-free even after the exemption drops.
Common strategies include:
- Spousal Lifetime Access Trusts (SLATs): One spouse gifts assets while retaining indirect access through the other spouse.
- Grantor Retained Annuity Trusts (GRATs): Ideal for transferring appreciating assets like real estate or investment portfolios.
- Irrevocable Life Insurance Trusts (ILITs): Keeps life insurance proceeds outside the taxable estate.
These tools can preserve access to assets while locking in today’s favorable exemption amounts.
2. Address New York’s “Cliff” Effect
Crossing just slightly above New York’s exemption can erase it entirely. Consider:
- Charitable bequests to bring your taxable estate below the limit.
- Gifting strategies to transfer appreciating assets early.
- Credit shelter or QTIP trusts to preserve each spouse’s separate exemption.
Even if you don’t have a federally taxable estate, these strategies can prevent an unexpected New York tax bill.
3. Review Real Estate and Life Insurance
- Appraise property now. A professional valuation helps ensure your estate plan reflects current market values.
- Confirm ownership structures. Align LLCs, trusts, and deeds with your estate plan to avoid unwanted inclusion in the taxable estate.
- Move life insurance policies into an ILIT. This prevents large death benefits from pushing your estate above the exemption threshold.
4. Model Scenarios Before 2026
Your estate planning attorney or financial advisor can model your estate under current and post-2026 rules. Running “what-if” scenarios helps determine when and how to gift assets, fund trusts, or rebalance ownership across family members.
If you haven’t done a full estate review recently, now is an excellent time to do so. Reviewing estate plans regularly ensures your documents and strategies evolve with the law—and with your family’s financial picture.
Frequently Asked Questions
1. Will the federal estate tax exemption definitely drop in 2026?
Unless Congress extends the current rules, the exemption will automatically revert to roughly half its 2025 level. While legislative changes are possible, planning now avoids last-minute decisions in 2025.
2. Does New York recognize federal portability?
No. Unlike the federal system, New York does not allow a surviving spouse to use any unused exemption from the first spouse. Proper trust planning can help preserve both spouses’ exemptions.
3. What if my estate is near the New York exemption but not over it?
That’s when the “cliff” becomes dangerous. Exceeding the threshold by even a small amount can trigger full taxation. Adjusting your estate value through charitable giving, gifts, or trust funding can keep you safely under the limit.
Next Steps
If your estate could approach the NY estate tax exemption 2026, now is the time to plan. The Village Law Firm helps New York families, professionals, and business owners align federal and state strategies to protect their legacies.
Schedule a consultation today to secure your plan before the window closes.
