New York Estate Planning in 2026: The $7.35M Cliff and the Credit Shelter Strategy
New York estate planning in 2026 has two anchors: the New York State estate tax with its $7.35 million exemption and steep cliff, and the federal estate tax with its $15 million individual / $30 million couple exemption under the OBBB Act. For New York couples building real assets, the state-level math is what drives the New York estate planning conversation more often than the federal.
Key takeaways
- The New York State estate tax exemption in 2026 is $7.35 million per individual, with the cliff under NY Tax Law Section 952 triggering at 105% of the exemption (about $7.72 million per the NY estate tax authority page). If the estate exceeds the cliff, the entire estate is subject to NY estate tax, not just the amount above the exemption. NY estate tax rates run from 3.06% to 16% graduated.
- New York has no spousal portability. Unlike the federal estate tax, an unused NY exemption does not transfer to the surviving spouse. This is the load-bearing reason couples near the cliff use credit shelter trust structures in New York estate planning.
- Credit shelter (or bypass) trusts let couples preserve both exemptions. Up to $7.35 million from the first spouse's death funds the bypass trust, which is excluded from the surviving spouse's NY taxable estate. The remaining assets pass directly to the surviving spouse.
- The federal exemption is $15 million per individual or $30 million per couple under the OBBB Act, permanent and indexed. For most NY couples, the state-level math matters more than the federal because the state threshold is much lower.
- Neptune's $2,500 estate plan covers the NY standard set including credit shelter trust language for couples near the state cliff. For couples approaching the $30M federal exemption, Neptune routes to a tax-focused specialist.
The New York estate tax cliff in detail
The most distinctive feature of the New York estate tax is the cliff. The exemption is $7.35 million in 2026. If the estate exceeds 105% of the exemption (about $7.72 million), the entire taxable estate is subject to NY estate tax, not just the amount above the exemption.
For an estate at exactly $7.35 million, the NY tax is zero. For an estate at $7.72 million, the NY tax kicks in on the entire estate, which can be hundreds of thousands of dollars. The cliff creates a strong planning incentive for couples whose estates approach the threshold.
A worked example: a couple in Brooklyn Heights has a combined estate of $8 million. Without planning, at the second spouse's death, only the surviving spouse's $7.35 million exemption is available. The taxable estate is $650,000 over the cliff, which means the entire $8 million is subject to NY estate tax at the graduated 3.06% to 16% rate. The NY tax bill is approximately $720,000.
The same couple with proper credit shelter planning: at the first spouse's death, $7.35 million funds the credit shelter trust (using the first spouse's exemption). The remaining $650,000 passes to the surviving spouse. At the second spouse's death, the credit shelter trust assets are excluded from the NY taxable estate, and the surviving spouse's personal estate ($650,000 plus any growth) is well under the $7.35 million exemption. NY tax bill: zero. Difference: roughly $720,000 in NY estate tax avoided.
Strategies to manage the New York estate planning cliff:
- Lifetime gifting to bring the estate under the threshold.
- Credit shelter trust structuring at the first spouse's death to use both exemptions.
- Charitable bequests that reduce the taxable estate below the cliff.
- Annual exclusion gifts ($19,000 per recipient per donor in 2026 per IRS Revenue Procedure 2025-32).
The New York portability problem
Federal estate tax has portability: an unused federal exemption from the first spouse's death can be transferred to the surviving spouse. Both spouses can effectively use both exemptions ($30 million combined for couples under the OBBB Act).
New York does not have portability. Each spouse has their own $7.35 million exemption, and the unused portion at the first spouse's death is lost unless the planning structure captures it.
The credit shelter trust (also called a bypass trust or family trust) is the standard tool to capture the first spouse's exemption. At the first spouse's death, up to $7.35 million of assets pass into the credit shelter trust, which is excluded from the surviving spouse's NY taxable estate. The surviving spouse can be a beneficiary of the credit shelter trust and receive distributions during life. At the surviving spouse's death, the trust assets pass to the children or other beneficiaries.
The credit shelter trust effectively doubles the NY exemption for the couple, from $7.35 million to $14.7 million combined. For couples whose combined estate is approaching the cliff, the credit shelter structure is the single most important planning tool in New York estate planning.
How the credit shelter trust actually works
The mechanics of a credit shelter trust:
1. At the first spouse's death, the revocable trust splits into two trusts: the credit shelter (or bypass) trust funded with up to the NY exemption amount ($7.35M), and the surviving spouse's continuing trust funded with the rest.
2. The credit shelter trust is irrevocable at the first spouse's death and is excluded from the surviving spouse's taxable estate.
3. The surviving spouse can be a beneficiary of the credit shelter trust and receive income or principal distributions during life, with appropriate trustee oversight.
4. At the surviving spouse's death, the credit shelter trust assets pass to the remainder beneficiaries (typically children) without being subject to NY estate tax again.
The credit shelter trust language is built into the revocable trust at drafting time as part of the standard New York estate planning package. It does not require any action by the couple during life; it activates automatically at the first spouse's death.
The step-up in basis dimension
New York estate planning also needs to account for the step-up in basis mechanic at the first spouse's death. Federal law resets the cost basis of appreciated assets to fair market value at death, which eliminates the capital gains tax on all prior appreciation for the surviving spouse or the ultimate beneficiaries.
For NY couples with appreciated brokerage accounts, real estate, or vesting equity, the step-up interacts with the credit shelter trust in ways worth understanding. Assets funded into the credit shelter trust at the first spouse's death receive a step-up at that point. When the surviving spouse dies, the credit shelter assets do not receive a second step-up (because they are not in the surviving spouse's taxable estate). Assets that remain in the surviving spouse's estate get the second step-up but are then subject to NY estate tax if the estate is above the cliff. The trade-off between the second step-up and the NY estate tax savings is part of what the credit shelter drafting sorts out.
How the federal exemption changes the math
Under the OBBB Act, the federal exemption is $15 million per individual or $30 million per couple, permanent and indexed for inflation. For NY couples with combined estates below $30 million, the federal estate tax is not the operative concern; the NY state tax cliff is.
For NY couples with estates approaching $30 million, both federal and state planning come into play. The credit shelter trust handles the state side; SLAT structuring or other irrevocable trust techniques handle the federal side. Neptune's standard plan covers the foundation; tax-focused specialists handle the federal-level irrevocable structuring.
What a New York estate plan typically includes
A standard New York estate plan for a couple includes:
1. Revocable living trust with credit shelter trust language for couples near the cliff. The credit shelter language activates at the first spouse's death.
2. Pour-over wills for each spouse.
3. Healthcare directives for each spouse. NY uses the Health Care Proxy under the Health Care Proxy Public Health Law Article 29-C statute (Sections 2980-2994), signed and dated in the presence of two adult witnesses.
4. Durable powers of attorney for financial decision-making. NY uses the statutory short form under GOL Section 5-1501 (see Durable POA form).
5. Guardian designations for any minor children.
For couples comfortably under the NY cliff (combined estates under $7 million), the credit shelter language may not be necessary but is typically still drafted in case assets grow. For couples near or above the cliff, the credit shelter language is the load-bearing piece of the New York estate planning package.
The equitable distribution baseline
New York is an equitable distribution state (not community property like California or Texas). At divorce, marital property is divided based on multiple factors including duration of the marriage, each spouse's contribution, and each spouse's separate assets. Premarital assets are separate property; marital property is anything acquired during the marriage.
For New York estate planning, the equitable distribution baseline matters because it interacts with the estate plan at first spouse's death. Assets in the deceased spouse's separate estate are governed by that spouse's will or trust; marital assets are governed by beneficiary designations or the surviving spouse's rights under NY EPTL. Getting the separate-vs-marital characterization right is part of the estate plan setup.
What about non-NY-resident decedents with NY property?
NY estate tax applies to NY-source property even if the decedent was not a NY resident. A California resident who owns a Manhattan apartment, for example, has the apartment in their NY taxable estate at death. The cliff still applies; if NY-source property exceeds 105% of the exemption, the entire NY-source estate is taxed.
For couples with significant NY real estate but primary residence elsewhere, a state-specific trust funding analysis is warranted. The standard plan covers the foundation; specialist work handles the multi-state structuring if needed. This is a common situation for tech founders or entertainment industry professionals with a Manhattan pied-à-terre.
How Neptune fits
Neptune's $2,500 estate plan covers the New York estate planning standard set including credit shelter trust language for couples near the state cliff. AI-led intake plus state-licensed NY estate planning attorney drafting in two to four weeks. For NY couples with combined estates approaching the $30 million federal exemption, Neptune routes to a tax-focused trusts and estates specialist for the federal-level structuring.
For couples whose situation involves blended families (children from prior relationships), the standard credit shelter language may need a QTIP trust overlay to lock in remainder beneficiaries while providing for the surviving spouse. Neptune's attorneys flag this at intake.
Related guides
Frequently asked questions
What happens if our estate crosses the NY cliff by a small amount?
The entire taxable estate becomes subject to NY estate tax, not just the amount over the exemption. For an estate at $7.8 million (just over the 105% threshold), the NY tax can be over $700,000. The cliff is the reason New York estate planning matters even for couples who think they're well under the federal exemption.
Does the credit shelter trust affect our surviving spouse's lifestyle?
The credit shelter trust is typically drafted with the surviving spouse as a beneficiary who can receive distributions for health, education, maintenance, and support. The structure preserves the first spouse's NY exemption while keeping the surviving spouse's access to the assets practical.
Does NY have an inheritance tax?
No, NY only has an estate tax (paid by the estate, not the heirs). Some states (PA, NJ) have inheritance taxes paid by heirs. New York does not.
Do we still need a will if we have a trust?
Yes. The pour-over will catches any assets not yet retitled into the trust at death and routes them into the trust. Wills also handle guardian designations for minor children under NY EPTL.
What if we move to NY from another state with a different estate tax structure?
The trust travels with you, but the new state's estate tax considerations apply at death. A move to NY from, say, California means the NY cliff now applies. The plan should be reviewed for state-specific updates within the first year of the move.
Can we use both the credit shelter trust and a SLAT?
Yes, for couples whose combined estate is above $30 million (the federal exemption). The credit shelter trust handles the NY state side at the first spouse's death; the SLAT handles the federal side during life. Both can run alongside each other with proper drafting. This is specialist work that sits on top of Neptune's standard plan.
How often should we update the credit shelter trust?
The credit shelter language itself rarely needs updating. The asset list, beneficiary designations, and trustee designations are the parts that change as life changes. Most couples review the plan every three to five years or after a major life event.
Does the credit shelter trust file its own tax return?
After the first spouse's death, when the credit shelter trust is funded, yes. The trust files an annual fiduciary income tax return (Form 1041) at the federal level and the equivalent NY return. The trustee handles this; for couples using a corporate trustee, the cost is bundled into the trustee's fee.
What if the NY cliff moves in 2027 or 2028?
The NY estate tax exemption is adjusted annually for inflation under NY Tax Law Section 952. The $7.35 million figure will likely climb modestly in 2027 and beyond, but the cliff mechanic (105% of exemption triggers full taxation) is unchanged. New York estate planning conversations should be revisited when the annual adjustment changes the threshold materially.
Written by
Ronke Oyekunle
Co-Founder & COO, Neptune