The Federal Exemption: $13.99 Million for 2026

The Tax Cuts and Jobs Act of 2017 roughly doubled the federal estate tax exemption. For a while, that increase was scheduled to sunset at the end of 2025, which would have dropped the exemption back to around $7 million. That didn’t happen. The One Big Beautiful Bill Act (OBBBA) signed into law made the higher exemption permanent, indexed for inflation.

For 2026, the federal exemption lands at roughly $13.99 million per individual. Married couples who do proper planning can shield close to $28 million combined. Estates that exceed the exemption face a 40% federal estate tax rate on the excess. That rate hasn’t changed.

Portability still applies — a surviving spouse can claim the deceased spouse’s unused exemption by filing a timely Form 706 estate tax return, even when no tax is owed.

New York’s Estate Tax: The $7.16 Million Cliff

Here’s where it gets uncomfortable for New York residents. The state exemption for 2026 is $7.16 million, less than the federal exemption by nearly $7 million. And New York’s cliff provision is one of the harshest in the country.

The cliff works like this: if your taxable estate exceeds 105% of the exemption amount ($7.518 million for 2026), the entire exemption disappears. Not just the excess — the whole thing. Your estate goes from owing nothing to New York to being taxed on every dollar from the first one. New York estate tax rates range from 3.06% to 16% on taxable estates.

A practical example: an estate worth $7.1 million pays zero New York estate tax. An estate worth $7.6 million — just $500,000 more — pays roughly $430,000 in state estate tax. That gap is what makes the cliff so dangerous.

Planning Strategies for New York Residents

The $7 million gap between the federal and New York exemptions creates a specific planning zone. If your estate falls between $7.16 million and $13.99 million, you owe no federal estate tax but could owe significant New York estate tax. Several strategies address this directly:

• Irrevocable life insurance trusts (ILITs) — life insurance proceeds outside your taxable estate can provide liquidity to pay New York estate taxes without shrinking the estate further
• Lifetime gifting — New York doesn’t impose a state gift tax, though gifts made within three years of death are clawed back into the New York taxable estate
• Credit shelter trusts — sometimes called bypass trusts, these allow the first spouse to die to use their New York exemption while preserving the federal exemption through portability
• Charitable remainder trusts — reduce the taxable estate while generating income during your lifetime
• Domicile changes — some New Yorkers establish residency in states without estate taxes, though New York audits domicile changes aggressively

The three-year clawback on gifts is a New York-specific trap. If you give away $2 million and die within three years, that amount gets added back to your New York taxable estate. Federal law doesn’t have an equivalent rule for amounts within the exemption.

Real Estate and the New York Exemption

Manhattan and Brooklyn real estate values make the New York cliff especially relevant. A brownstone in Park Slope, a co-op on the Upper West Side, and a retirement account can easily push an estate past $7.16 million without anyone feeling “wealthy” in the traditional sense. These aren’t families with private jets — they’re people whose home appreciated over 30 years.

Qualified personal residence trusts (QPRTs) can transfer a home out of the taxable estate at a discounted value. The trade-off is that you give up ownership after the trust term expires, and if you die during the term, the house goes back into the estate at full value. Timing matters.

Federal vs. New York: Side-by-Side for 2026

• Federal exemption: ~$13.99 million per person
• New York exemption: $7.16 million per person
• Federal top rate: 40%
• New York top rate: 16%
• Federal cliff: none (graduated rates above exemption)
• New York cliff: exemption eliminated at 105% of threshold
• Portability: federal yes, New York no

That last point is easy to miss. New York does not recognize portability. When the first spouse dies, their New York exemption is gone if it isn’t used through a trust or other mechanism. The federal exemption can be transferred to the surviving spouse. The state exemption cannot.