Navigating the 2026 Estate Tax Cliff in NY
For more than 30 years, I have guided New Yorkers through the ever-shifting landscape of estate and tax law. In all that time, I have rarely seen a legislative change as predictable, as significant, and as urgent as the one we face today. On January 1, 2026, a financial cliff is scheduled to appear for millions of families, and the window to prepare for it is closing rapidly. This is the sunset of the Tax Cuts and Jobs Act of 2017 (TCJA), and it will fundamentally alter the reality of estate planning for a generation.
The TCJA temporarily doubled the federal estate tax exemption, creating a golden era of tax-free wealth transfer for many. But this was a temporary reprieve, not a permanent change. As of right now, in late 2025, that high exemption is set to be cut in half. For many New Yorkers with substantial assets in real estate and investments, this is not a distant concern; it is an imminent threat to their legacy. An estate that is entirely tax-free today could suddenly face a 40% federal tax bill in just a few months.
This guide is not an academic exercise; it is an urgent call to action and a strategic manual. At Morgan Legal Group, we are proactively working with clients to navigate this deadline. We will explain what the 2026 estate tax cliff is, how it specifically impacts New Yorkers, and detail the powerful legal strategies you can use *before the end of 2025* to protect your assets. The clock is ticking. For a time-sensitive review of your plan, contact our firm immediately.
Part 1: Understanding the 2026 Estate Tax Cliff
To grasp the urgency of the situation, it is crucial to understand the current law, how it is scheduled to change, and how this federal change interacts with New York State’s own separate estate tax. This convergence of laws creates a unique challenge for residents of our state.
The Law Today: The “High Exemption” Era (2018-2025)
The Tax Cuts and Jobs Act (TCJA) of 2017 dramatically increased the federal gift and estate tax exemption. This exemption is the amount of money a person can give away during their lifetime or at death without incurring the federal gift or estate tax. For 2025, this exemption amount is an unprecedented $13.61 million per person. For a married couple, this means they can shield over $27 million from federal estate taxes through a concept called “portability,” where a surviving spouse can use any of their deceased spouse’s unused exemption.
This historically high number has made federal estate tax a non-issue for the vast majority of Americans. Consequently, many families who created or updated their estate plans during this period did so without a focus on federal tax mitigation.
The Law on January 1, 2026: The “Sunset”
The increased exemption under the TCJA was not permanent. The law was written with a “sunset” provision, meaning it automatically expires at the end of 2025. On January 1, 2026, the law will revert to its pre-TCJA state. The federal estate tax exemption will be cut roughly in half, to an estimated $7 million per person (adjusted for inflation). Any assets above this new, much lower threshold will be subject to a federal estate tax of up to 40%.
The New York Problem: A Tale of Two Taxes
For New Yorkers, the situation is even more complex. New York has its own, separate estate tax with a much lower exemption amount ($6.94 million in 2025). Importantly, New York’s tax system has its own “cliff.” If the value of your estate is more than 105% of the NY exemption amount, you don’t just pay tax on the excess; you lose the exemption entirely and pay tax on the entire estate. Furthermore, New York does not recognize the “portability” of exemptions between spouses.
A Scenario: The Cliff in Action
Consider a married couple in Long Island with a combined estate of $15 million.
- If one spouse dies in 2025: Their estate is well below the federal exemption of $27.22 million for a couple. They owe $0 in federal estate tax. They would likely owe NYS estate tax, but the federal issue is off the table.
- If one spouse dies in 2026: The federal exemption drops to approximately $14 million for a couple. Their $15 million estate is now $1 million over the threshold, triggering a potential federal estate tax of approximately $400,000 (40% of $1 million), *in addition* to their New York State estate tax liability.
This is the 2026 tax cliff. An estate that is perfectly safe today can face a massive tax bill tomorrow. The good news is that there is a powerful, but time-sensitive, way to avoid this.
Part 2: The Proactive Solution – Strategic Gifting Before the Sunset
The most powerful tool we have to combat the 2026 sunset is strategic gifting. The IRS has issued “anti-clawback” regulations, providing a critical assurance: large gifts made using the high exemption before the end of 2025 will *not* be penalized or “clawed back” into your estate if you die after the exemption drops. This creates a once-in-a-generation planning opportunity.
Strategy 1: Outright Annual and Lifetime Gifting
The simplest method is to make direct gifts. Every individual can give a certain amount (the “annual exclusion,” which is $18,000 for 2024 and projected to be higher in 2025) to as many people as they wish each year without any tax consequences. For larger transfers, you can use your substantial lifetime gift tax exemption (the same $13.61 million as the estate tax exemption) to make large, tax-free gifts of cash or stock to your children or other heirs now, removing that wealth and all its future appreciation from your taxable estate forever.
Strategy 2: The Irrevocable Life Insurance Trust (ILIT)
A common mistake is assuming that life insurance proceeds are not taxed. While they are not subject to income tax, the death benefit is included in your taxable estate. A multi-million dollar life insurance policy can easily push an otherwise non-taxable estate over the 2026 threshold.
The Solution: An ILIT is a type of irrevocable trust created specifically to own your life insurance policies. You make gifts to the trust, and the trustee uses those funds to pay the premiums. Since you do not legally own the policy, the death benefit is paid to the trust for your beneficiaries completely free of both federal and New York estate taxes. This is a foundational tool in our wills and trusts practice.
Strategy 3: The Spousal Lifetime Access Trust (SLAT)
The SLAT is one of the most powerful pre-2026 planning tools available to married couples. It allows you to “use” your high exemption without completely losing access to the funds.
How it Works: One spouse (the “donor spouse”) makes a large gift to an irrevocable trust for the benefit of the other spouse (the “beneficiary spouse”) and potentially their children. The gift uses the donor spouse’s high exemption and removes the assets from their combined taxable estates. However, the beneficiary spouse can receive distributions from the trust. This provides the family with indirect access to the gifted funds if needed, offering a significant safety net. A consultation with an attorney like Russel Morgan is essential for this complex strategy.
Part 3: Advanced Trusts and Techniques for the New Tax Reality
Beyond direct gifting and SLATs, several other sophisticated techniques can be used before the 2025 deadline to transfer wealth while minimizing tax exposure. These strategies require the guidance of an experienced legal and financial team.
Strategy 4: Grantor Retained Annuity Trusts (GRATs)
A GRAT is a powerful tool for transferring asset appreciation to the next generation with minimal gift tax liability. You, as the grantor, transfer assets into a trust and retain the right to receive an annuity payment for a set term of years. At the end of the term, any assets remaining in the trust (the appreciation above the IRS-set interest rate) pass to your beneficiaries tax-free. This is particularly effective for highly appreciating assets like pre-IPO stock.
Strategy 5: Charitable Trusts (CLTs and CRTs)
For philanthropically inclined individuals in Westchester and beyond, charitable trusts can achieve both tax-planning and charitable goals. A Charitable Remainder Trust (CRT) provides you with an income stream for life, with the remainder passing to your chosen charity at your death. A Charitable Lead Trust (CLT) does the reverse, making payments to a charity for a set term, with the remainder passing to your family, often with significant tax savings.
Strategy 6: The Return of the Bypass Trust
During the high exemption era, many married couples relied on “portability.” However, with the lower 2026 exemption and the fact that New York does not recognize portability, the Bypass Trust (or Credit Shelter Trust) will become essential again. This type of trust is created at the death of the first spouse to hold and protect their exemption amount. The surviving spouse can benefit from the trust assets during their lifetime, but the assets (and all their appreciation) “bypass” the survivor’s taxable estate, passing to the children tax-free. This is a more robust strategy than portability alone for navigating both NYS and federal estate tax.
Part 4: Your End-of-2025 Action Checklist
The deadline is firm: December 31, 2025. Action in the coming months is critical. Use this checklist to guide your next steps.
- Calculate Your Total Net Worth: Do not guess. Tally the value of your home, investments, retirement accounts, business interests, and life insurance death benefits. You may be closer to the 2026 exemption than you realize.
- Review Your Current Estate Plan: Pull out your existing will, trust, and other documents. Were they designed in the high-exemption era? Do they contain any tax-planning provisions?
- Model Your Potential 2026 Tax Liability: Subtract the projected 2026 exemption (approx. $7 million per person) from your net worth. If the number is positive, you have a potential federal estate tax problem.
- Schedule a Consultation Immediately: This is a complex area of law, and the planning strategies take time to implement. Do not wait until the last minute. Schedule a consultation with our firm to begin your analysis.
Conclusion: The Clock is Ticking
The 2026 estate tax cliff is not a speculative event; it is a scheduled change in the law. We are currently in a unique and rapidly closing window of opportunity. The ability to leverage the historically high federal estate tax exemption to transfer wealth tax-free will disappear in a matter of months. For families in New York with significant assets, taking decisive action in 2025 is not an option; it is a financial necessity.
The strategies outlined in this guide—from ILITs and SLATs to a renewed focus on Bypass Trusts—are powerful, legal, and effective. But they cannot be implemented overnight. They require careful analysis, thoughtful drafting, and meticulous execution. Do not let this opportunity pass you by. Protect your legacy from a preventable and significant tax bill. Contact Morgan Legal Group today for a time-sensitive review of your estate plan, and let us help you navigate the cliff before it arrives.
For official information regarding the federal estate and gift tax, you can visit the resources provided by the Internal Revenue Service (IRS).
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