How to Avoid the New York State Estate Tax Cliff
When someone passes away in New York in 2025, there is a $7.16 million estate tax exclusion amount, which is significantly lower than the $13.9M exemption amount available at the federal level. However, in addition to the lower estate tax exemption amount, there are also two estate tax traps specific to New York that residents need to be aware of when completing their estate plan. Those two tax traps are:
The $7.5 million Cliff Rule
No Portability between spouses
With proper estate planning, these tax traps can potentially be avoided, allowing residents of New York to side-step a significant state tax liability when passing assets onto their heirs.
New York Estate Tax Cliff Rule
When it comes to estate planning, it’s important to understand that estate tax rules at the federal and state levels can vary. Some states adhere to the federal rules, but New York is not one of those states. New York has a very punitive “cliff rule” where once an estate reaches a specific dollar amount, the New York estate tax exemption is eliminated, and the ENTIRE value of the estate is subject to New York state tax.
As mentioned above, the New York estate tax exemption for 2025 is $7,160,000. So, for anyone who lives in New York and passes away with an estate that is valued below that amount, they do not have to pay estate tax at the state or federal level.
For individuals that pass away with an estate valued between $7,160,000 and $7,518,000, they pay estate tax to New York only on the amount that exceeds the $7,160,000 threshold.
But the “cliff” happens at $7,518,000. Once an estate in New York exceeds $7,518,000, the ENTIRE estate is subject to New York Estate Tax, which ranges from 3.06% to 16% depending on the size of the estate.
Non-Portability Between Spouses in New York
Married couples that live in New York must be aware of how the portability rules vary between the federal and state levels. “Portability” is something that happens at the passing of the first spouse, and it refers to how much of the unused estate tax exemption can be transferred or “ported” over to the surviving spouse. The $13.9M federal estate tax exemption is “per person” and “full portable”. Why is this important? It’s common for married couples to own most assets “jointly with rights of survivorship”, so when the first spouse passes away, the surviving spouse assumes full ownership of the asset. However, since the spouse who passed away did not have any assets solely in their name, there is nothing to include in their estate, so the $13.9M federal estate tax exemption at the passing of the first spouse goes unused.
At the federal level that’s not an issue because the federal estate tax exemption for a married couple is portable, which means if the first spouse that passes away does not use their full estate tax exemption, any unused exemption amount is transferred to the surviving spouse. Assuming that the spouse who passes away first does not use any of their estate tax exemption, when the second spouse passes, they would have a $27.8 million federal estate tax exemption ($13.9M x 2).
However, New York does not allow portability, so any unused estate tax exemption at the passing of the first spouse is completely lost. The fact that New York does not allow portability requires more proactive estate tax planning prior to the passing of the first spouse.
Here is a quick example showing how this works: Larry & Kathy are married and have an estate valued at $10M in which most of their assets are titled jointly with rights of survivorship. Since everything is titled jointly, if Larry were to pass away in 2025, the $10M in assets would transfer over to Kathy with no estate taxes due at either the Federal or State level. The problem arises when Kathy passes away 2 years later. Assuming Kathy passes away with the same $10M in her name, there is still no federal estate taxes due because she more than covered by the $27.8M exemption at the federal level, however, because New York’s estate tax exemption is not portable, and her assets are well over the $7.5M cliff, the full $10M would be taxed by the New York level, resulting in close to a $1M tax liability. A tax liability that could have been completely avoided with proper estate planning.
If instead of Larry and Kathy holding all of their assets jointly, they had segregated their assets to $5M owned by Larry and $5M owned by Kathy, when Larry passed away, he would have been able to use his $7.1M New York State estate tax exemption to protect the full $5M. Then, when Kathy passed with her $5M two years later, she would have been able to use her full $7.1M New York State tax exemption, resulting in $0 in taxes paid to New York State — avoiding nearly $1M in unnecessary tax liability.
Setting Up Separate Trusts
A common solution that our clients will use to address both the $7.5M cliff and the non-portability issue in New York is that each spouse will set up their own revocable trust, and then split the non-retirement account assets in a way to maximize the $7.1M New York State exemption amount at the passing of the first spouse.
I will sometimes hear married couples say “Well, we don’t have to worry about this because our total estate is only $6 million.” That would be true today, but if that married couple is only 70 years old, and they are both in good health, what if their assets double in size before the first spouse passes? Now they have a problem.
Special Legal Disclosure: This article is for educational purposes only, and it does not contain any legal advice. For legal advice, please contact an attorney.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQ):
What is the New York estate tax exemption for 2025?
In 2025, New York’s estate tax exclusion amount is $7.16 million per person, which is significantly lower than the federal estate tax exemption of $13.9 million. Estates valued below $7.16 million are not subject to New York or federal estate tax, but larger estates may face substantial state tax liability.
What is the New York “estate tax cliff rule”?
The “cliff rule” means that if an estate exceeds 105% of the exemption amount—$7.518 million in 2025—the entire estate becomes subject to New York estate tax, not just the amount above the threshold. Once an estate crosses the cliff, tax rates ranging from 3.06% to 16% can apply to the entire estate value.
How does New York’s estate tax differ from federal estate tax rules?
Unlike federal law, which allows full portability between spouses and a much higher exemption amount, New York has no portability and a lower threshold. This means any unused exemption at the first spouse’s death is lost unless proactive estate planning is done.
What does “non-portability” between spouses mean in New York?
Non-portability means a surviving spouse cannot use the unused estate tax exemption of their deceased spouse. Without planning, the first spouse’s exemption is forfeited, potentially exposing the surviving spouse’s estate to higher New York taxes later.
How can married couples avoid the New York estate tax cliff and non-portability issue?
Couples can establish separate revocable trusts and divide ownership of assets so that each spouse has enough in their name to fully use their individual New York estate tax exemption. This strategy allows both exemptions to be utilized and avoids unnecessary state taxes at the second spouse’s death.
Why does asset titling matter for estate tax planning in New York?
Jointly held assets automatically transfer to the surviving spouse and bypass the first spouse’s estate, preventing use of that spouse’s exemption. Properly titling assets between spouses or placing them in individual trusts ensures both exemptions can be applied.
When should New York residents start estate tax planning?
It’s wise to plan early—especially for couples whose combined assets approach or exceed $5–6 million. Asset growth, real estate appreciation, and investment performance can easily push estates over the $7.5 million threshold in the future, triggering significant tax liability without planning.
