Trust & Estate Tax Planning in New York: Defeating the Cliff Before It Defeats Your Legacy

The New York Estate Tax Cliff: Understanding What Is Actually at Stake

The federal estate tax exemption stands at $13.61 million per individual in 2024, with portability allowing a surviving spouse to use any unused exemption from their deceased spouse. New York's $6.94 million exemption means that many New York families who owe zero federal estate tax still face substantial New York state estate tax. More critically, New York's cliff mechanism means an estate of $7.3 million is taxed on the entire $7.3 million — not just on the amount exceeding the exemption — at rates beginning at 3.06% and reaching 16% at higher values. An estate of exactly $7.3 million can face a New York estate tax liability approaching $700,000.

For New York-domiciled families with estates in this cliff zone, the most effective strategy is a sustained annual gifting program designed to bring the taxable estate below the New York exemption threshold before death occurs. Annual exclusion gifts — $18,000 per recipient per year in 2024, per donor — allow systematic wealth transfer without gift tax. Properly documented gifts to an irrevocable trust can remove assets from the estate permanently while the grantor retains no retained interest that would pull those assets back into the estate under the estate tax inclusion rules. Our estate planning specialists design multi-year gifting calendars for families in the cliff zone.

Spousal Lifetime Access Trusts (SLATs): Removing Assets While Maintaining Indirect Access

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust established by one spouse for the benefit of the other. The grantor spouse makes a completed gift to the trust — funded with the federal gift tax exemption — permanently removing those assets from both spouses' taxable estates. The trustee can make distributions to the beneficiary spouse as needed for health, education, maintenance, and support, which means the family retains indirect economic access to the transferred assets while they compound outside the estate tax net.

For New York families, the SLAT becomes particularly powerful when combined with a grantor trust structure for income tax purposes. By making the SLAT a grantor trust under the income tax rules, the grantor continues to pay income taxes on the trust's earnings — effectively transferring additional wealth to the trust tax-free, since those income tax payments are not treated as additional gifts. Over ten years, this supplementary wealth transfer through the income tax payment mechanism can represent millions of dollars of additional value compounding inside the trust without gift tax cost. We design SLAT structures that satisfy both the estate tax objectives and the income tax efficiency goals, coordinated with the family's overall wealth planning strategy.

Trust Income Taxation in New York: The Resident Trust Rules

New York imposes its own income tax on trusts that are treated as New York resident trusts — generally, trusts created by a New York domiciliary or administered by a New York fiduciary. New York trust income tax rates mirror the individual income tax rates, meaning trust accumulated income can be taxed at 10.9% at the state level before the addition of federal taxes. For families establishing inter vivos or testamentary trusts with New York-domiciled grantors, the trustee selection and administration siting decisions have significant income tax implications. Appointing a trustee and centering trust administration in a state with zero income tax — South Dakota, Nevada, or Wyoming — can avoid New York's reaching authority over trust income in appropriate structures. Our trust planning advisors analyze residency and administration factors before every new trust formation.