How to Reduce or Avoid New York Estate Tax

How to Reduce or Avoid New York Estate Tax

New York State imposes a significant estate tax on estates that exceed a certain threshold. For Westchester County families with substantial assets, this tax can consume a significant portion of the estate, reducing what passes to heirs and charities.

The good news is that careful planning can reduce or nearly eliminate New York estate tax. Strategies range from simple lifetime gifting to more sophisticated trusts and charitable vehicles. Understanding these strategies and implementing them while you are healthy and have clear mental capacity is crucial.

The New York Estate Tax Threshold and Rate

New York imposes an estate tax on estates exceeding $7.35 million per person (in 2026, adjusted annually for inflation). This exemption applies separately to each person, meaning a married couple with proper planning can protect $14.7 million from New York estate tax.

Estates exceeding the exemption owe tax at rates ranging from 3.06% to 16%, depending on the amount over the exemption. These rates are in addition to federal estate tax, though federal tax applies only to estates exceeding $13.61 million (2024, adjusted annually).

For context, the federal exemption is significantly higher, but this will decrease to approximately $7 million per person in 2026, at which point federal rates will more closely align with New York rates.

If your estate is near or exceeds $7.35 million, planning is essential.

Strategy One: Lifetime Gifting

The most straightforward estate tax reduction strategy is lifetime gifting. You can give assets away during your lifetime, removing them from your taxable estate and avoiding tax on future growth.

The annual gift tax exclusion. You can give up to $18,000 per recipient per year (2024; this amount adjusts annually) without using any of your lifetime exemption. If you are married, both spouses can give, allowing up to $36,000 per year per recipient.

For example, if you have four children and you gift $18,000 to each child each year, you remove $72,000 from your estate annually without any estate tax consequence. Over ten years, this removes $720,000, plus all the growth on that money.

The lifetime gift and estate tax exemption. You also have a lifetime exemption from gift and estate tax. In 2026, this exemption is $7.35 million in New York (higher federally). Gifts beyond the annual exclusion reduce this lifetime exemption dollar-for-dollar. When you die, any remaining exemption is used for estate tax.

The strategy is to consider which assets are likely to grow significantly. Real estate, investment portfolios, and business interests appreciate over time. Gifting these assets removes the future growth from your taxable estate.

For example, suppose you own investment property likely to appreciate 5% annually. You gift the property to a trust for your children today. The property’s value at gift is $500,000. If the property appreciates to $800,000 by the time you die in ten years, you avoided estate tax on the $300,000 appreciation. Only the $500,000 value at gift is subject to gift tax (if it exceeds your annual exclusion).

Spousal Lifetime Access Trusts (SLATs). A SLAT is an irrevocable trust created for your spouse’s benefit. You can gift assets to the SLAT (up to your lifetime exemption), and the assets are not subject to estate tax when you die because they are not in your estate. Your spouse can access funds if needed. This strategy requires careful planning to avoid adverse tax consequences if your spouse predeceases you.

Strategy Two: Credit Shelter Trusts for Married Couples

For married couples, the credit shelter trust is one of the most effective tools for preserving both spouses’ estate tax exemptions.

A credit shelter trust (also called a bypass trust or exemption equivalent trust) is an irrevocable trust that holds assets equal to the first spouse’s estate tax exemption amount. When the first spouse dies, assets pass into the trust and are not subject to estate tax.

Here is how it works in practice:

Suppose Mary and John are married, and Mary dies first. Mary’s will provides that her estate (worth $7.35 million) passes into a credit shelter trust rather than directly to John. The trust is not subject to estate tax because Mary used her $7.35 million exemption.

John can continue to access the trust assets during his lifetime if needed. When John dies, the credit shelter trust is not part of John’s taxable estate (because John does not own it; the trust does). John’s own assets up to $7.35 million pass to beneficiaries using John’s exemption.

The result: The couple has protected $14.7 million from estate tax, rather than potentially losing half of John’s exemption if Mary’s estate passed directly to him.

This strategy requires careful drafting and coordination between husband and wife. The trust documents must specify that the trust is for the spouse’s benefit but also separate from the surviving spouse’s taxable estate.

Caution: The rules around credit shelter trusts are complex, especially under current law where the federal exemption is scheduled to decline in 2026. A experienced estate planning attorney is essential.

Strategy Three: Irrevocable Life Insurance Trusts (ILITs)

Life insurance can represent a significant portion of a high-net-worth person’s assets. Surprisingly, if you own the life insurance policy on your own life, the death benefit is included in your taxable estate.

An irrevocable life insurance trust (ILIT) solves this problem. An ILIT is a trust that owns a life insurance policy on your life. When you die, the life insurance proceeds go to the ILIT, not to your estate. The proceeds are distributed to beneficiaries according to the trust terms, completely tax-free.

How to set up an ILIT:

The ILIT is created as an irrevocable trust. Either the ILIT applies for the life insurance policy, or you transfer an existing policy to the ILIT. If you transfer an existing policy, you must survive the transfer by more than three years, or the entire death benefit will be included in your estate.

Once the ILIT owns the policy, you make premium payments to the ILIT (technically, you gift money to the ILIT to pay premiums). These gifts can be structured to fall within the annual gift exclusion, so they do not use your lifetime exemption.

When you die, the death benefit passes to the ILIT and is distributed to beneficiaries outside of your taxable estate.

Example: Suppose your estate is $8 million, and you have a $1 million life insurance policy. If you own the policy, your estate is $9 million, subject to New York estate tax on $1.65 million of it (assuming the $7.35 million exemption).

If the policy is in an ILIT, your taxable estate is $8 million, and the $1 million life insurance passes to beneficiaries tax-free. The difference in estate tax is significant.

ILITs are especially useful when life insurance is the primary way to fund estate taxes or provide liquidity to heirs.

Strategy Four: Charitable Giving and Charitable Remainder Trusts

If you have charitable intentions, several strategies combine charitable giving with estate tax reduction.

Outright charitable gifts. A charitable gift during your lifetime reduces your taxable estate and generates an income tax deduction. For high-net-worth individuals in high tax brackets, the income tax benefit can be substantial. You remove assets from your estate and reduce your income tax in one move.

Charitable remainder trusts (CRTs). A CRT is an irrevocable trust to which you transfer appreciated assets. The trust pays you or your beneficiaries income for a term of years or life. When the term ends, the remaining assets pass to a charity.

The benefits: You receive an income tax deduction when you create the CRT, based on the present value of the remainder going to charity. You receive income during the term. When the term ends, the remaining assets pass to charity and are not subject to estate tax.

CRTs are particularly powerful when you fund them with highly appreciated assets (stock, real estate) that you might otherwise need to sell. The trust can sell the assets without capital gains tax and reinvest for income.

Donor-advised funds (DAFs). A donor-advised fund is a charitable account through which you can make gifts to qualified charities. You contribute assets to the DAF, receive an immediate income tax deduction, and maintain advisory control over grants to charities over time.

DAFs are simpler than charitable trusts but provide similar tax benefits. They allow you to bunch charitable giving into a high-income year (for maximum tax benefit) while distributing to charities over time.

Strategy Five: Grantor Retained Annuity Trusts (GRATs)

A GRAT is an advanced strategy for high-net-worth individuals with appreciating assets (real estate, businesses, stock portfolios).

You transfer appreciating assets to an irrevocable trust. The trust pays you an annuity (regular payments) for a term of years. At the end of the term, remaining assets pass to beneficiaries tax-free (or with minimal gift tax).

If the assets appreciate faster than the IRS’s interest rate assumption, the appreciation passes to beneficiaries tax-free. GRATs are particularly effective when created during market downturns or with assets expected to appreciate significantly.

Example: You place a $2 million real estate portfolio worth $2 million into a 2-year GRAT. You receive annuity payments based on the $2 million initial value. If the portfolio appreciates to $2.5 million in two years, the $500,000 appreciation passes to your children with no estate or gift tax.

GRATs are complex instruments requiring careful attention to IRS requirements and trustee oversight. They are best used for substantially appreciating assets and require professional guidance.

Coordinating Federal and State Estate Tax Planning

A critical issue for Westchester families is coordinating New York State estate tax planning with federal estate tax planning. The exemptions are currently unequal, with the federal exemption significantly higher. However, this changes in 2026 when the federal exemption reverts to approximately $7 million.

A good estate plan addresses both. Credit shelter trusts, gift strategies, and trusts like ILITs and GRATs are effective under both federal and state law.

The key is working with an attorney who understands both federal and New York tax law and keeps your plan current as tax law changes.

Estimating Your Estate Tax Exposure

An important first step is calculating your likely estate tax exposure. This requires:

1. Listing all assets and their current values (house, investments, retirement accounts, life insurance)
2. Calculating your net estate (assets minus debts)
3. Comparing your net estate to the current New York exemption ($7.35 million for 2026)
4. If your estate exceeds the exemption, estimating taxes under current law
5. Considering how laws might change and planning accordingly

For example, if your estate is $10 million, you face estate tax on $2.65 million in New York. At a 16% top rate, this could be over $400,000 in state taxes alone. Proper planning might eliminate or significantly reduce this liability.

Coordination with Your Overall Estate Plan

Estate tax planning works best as part of a comprehensive estate plan that also addresses:

• A valid will or trust ensuring assets pass as you intend
• Beneficiary designations on retirement accounts and life insurance
• Powers of attorney for financial and health care decisions
• HIPAA releases allowing health care providers to discuss your condition with family
• A letter of intent regarding funeral wishes and personal matters

Each element works together to protect your family and honor your wishes.

When to Implement These Strategies

The time to implement tax planning strategies is now, while you are healthy, clear-headed, and have time. Many strategies, like ILITs, require you to survive a period after implementation (typically three years) for the strategy to work.

Moreover, as assets appreciate, the benefit of removing them from your estate increases. The sooner you implement strategies, the more growth they remove from your taxable estate.

For more information on the cost of estate planning and how to get started, see How Much Does Estate Planning Cost in Westchester County.

Next Steps

If your Westchester estate is near or exceeds $7.35 million, consult with an estate planning attorney who is experienced in tax planning. A comprehensive review of your assets, goals, and family situation will reveal which strategies are most effective for you.

If you are interested in simple planning tools like lifetime gifting, beneficiary designations, and basic trusts, see Do I Need Probate in New York for information on alternatives to probate, many of which reduce estate tax exposure.