How a Rochester, NY Couple Got Ahead of New York’s Estate Tax Cliff 

If you live in New York and your net worth has been climbing — through a retirement account, home equity, or a brokerage account that’s simply had a good decade — you may be closer to a very expensive tax cliff than you realize. New York doesn’t tax estates the way the federal government does. Cross the line by even a little, and the entire estate becomes taxable, not just the amount above it. 

That’s exactly the situation one of our client couples found themselves in. With their permission, and with names and identifying details changed to protect their privacy, we’re sharing how a coordinated update between their O’Keefe Stevens advisor and their estate planning attorney repositioned their plan — before the cliff became a bill. 

Key takeaways 

• New York’s estate tax has a “cliff”: exceed the exemption by more than 5% and you lose the exemption entirely, owing tax on the full estate value. 

• A lopsided estate — most assets in one spouse’s name — is one of the most common ways couples accidentally back into that cliff. 

• Two revocable trusts, a credit shelter trust, and smart use of beneficiary designations can restore balance without sacrificing flexibility. 

• New York’s three-year gift look-back (versus no state gift tax at all) makes early, modest gifting a powerful, low-risk planning lever. 

• The biggest lever most families miss isn’t a document — it’s getting their financial advisor and estate attorney planning together, in the same room. 

What Is New York’s Estate Tax Cliff? 

New York’s estate tax exemption (the “basic exclusion amount”) is adjusted for inflation each year and currently sits just over $7 million per person. Below that number, a New York estate generally owes no state estate tax. 

The catch is what happens right above it. Unlike the federal system, which only taxes the amount over the exemption, New York uses a “cliff”: if a taxable estate exceeds the exemption by more than 5%, the exemption disappears completely and the entire estate is taxed — not just the excess. A married couple with no additional planning can also lose one spouse’s exemption entirely at the first death, since New York doesn’t offer portability between spouses the way the federal estate tax does. 

That combination — no portability, plus a hard cliff — is why coordinated planning matters more in New York than in most states. 

Meet Judy and Daryl: A Snapshot 

• Location: Greater Rochester, NY 

• Household: A married couple in their mid-60s, with one adult son 

• Net worth: Roughly $5.5–6 million, heavily concentrated in a single IRA 

• Estate plan: Last substantively updated more than ten years earlier 

• Engagement: A joint planning session between their O’Keefe Stevens financial advisor and their estate planning attorney 

Ten years earlier, Judy and Daryl’s estate plan made sense for their finances at the time. But a decade of saving, market growth, and a large retirement account had quietly moved them into a very different bracket — one their existing wills and beneficiary designations were never built to handle. 

The Problem: An Estate Growing Faster Than the Plan 

The core issue wasn’t the couple’s overall net worth — it was how unevenly it was distributed. Their IRA, by far their largest asset, was owned entirely by one spouse. The home and a brokerage account made up most of the rest. 

That imbalance creates a specific risk: if the spouse holding the IRA passed away first, the survivor would suddenly own nearly the entire estate outright. Combine that with the fact that New York doesn’t let a surviving spouse inherit a deceased spouse’s unused exemption, and the couple’s combined planning opportunity was at risk of shrinking to a single exemption — right as their total assets were approaching it. 

Their existing documents also hadn’t been written with today’s asset levels, today’s retirement account rules, or the possibility of relocating in mind. 

The O’Keefe Stevens Approach: One Table, Not Two Silos 

The single biggest structural difference in how this plan came together wasn’t a clause in the trust — it was the process. Instead of the financial advisor and the estate attorney working in separate conversations, with the couple relaying details back and forth, the update was built jointly, in one session. 

Retirement account distribution rules, long-term care coverage, cash-flow projections, and tax exposure were all on the table at once, so drafting decisions reflected the couple’s complete financial picture rather than a generic legal template. That’s the difference between a plan that technically works and a plan that’s actually optimized for the family living under it. 

The Strategy: Four Coordinated Moves 

1. Two revocable trusts, built toward parity 

Rather than a single shared plan, each spouse received an individual revocable trust. Going forward, surplus retirement account distributions, along with the home and brokerage account, are directed toward the historically underfunded trust — gradually building parity between the two. The goal: no matter which spouse passes first, each trust is sized to make full use of that spouse’s own New York exemption. 

2. A credit shelter trust, funded with care 

At the first spouse’s death, assets flow into a credit shelter (or “bypass”) trust instead of passing outright to the survivor. This keeps those assets outside the surviving spouse’s own taxable estate, while the survivor retains full access as trustee and beneficiary. Because funding a trust like this directly with retirement assets can trigger unwanted income tax acceleration, it’s funded primarily with non-retirement assets, with disclaimer language built in as a flexible backup option. 

3. The IRA stays outside the trust — on purpose 

The couple’s largest and most complex asset, their IRA, passes by beneficiary designation rather than through either trust. That preserves the more favorable distribution options available to an individual heir. A disclaimer provision gives the surviving spouse the ability to decide, after the fact and based on real numbers, how much to keep outright (maximizing income tax deferral) versus disclaim into the credit shelter trust (reducing future estate tax exposure). It’s a decision deliberately left for the future, when the actual facts are known. 

4. A gifting strategy, started years early 

New York imposes no state gift tax at all, and only pulls gifts back into a taxable estate if they were made within three years of death — a meaningfully shorter window than many people assume. For a household in this net-worth range, that mismatch between federal and state rules supports a modest, regular gifting program started well before the exemption threshold is ever in sight, rather than a rushed decision made under pressure during a health crisis. 

Built to Move, Built to Last 

Revocable trusts travel well between states. If Judy and Daryl ever relocate, their documents remain fully valid, and typically need only light updates — not a rebuild from scratch — to reflect a new state’s practical conventions. Meanwhile, a long-standing New York Partnership long-term care policy retains its Medicaid asset-protection value, as long as any future long-term care is received in New York. 

Probate avoidance — the original reason many people build a revocable trust plan in the first place — holds regardless of which state they’re in when they pass. And the plan is scheduled for a full review roughly every five years, so it evolves with law changes, asset growth, and family milestones instead of quietly going stale again. 

The Result 

• Both spouses’ exemptions are now positioned to be usable — instead of one spouse’s estate absorbing nearly everything at the first death. 

• Probate is avoided at both deaths, leaving a simpler, faster administrative process for their heir. 

• The plan travels with them, whether they stay in New York or relocate in retirement. 

• Their son has a clear, simple inheritance structure, plus a head start on building his own estate plan when the time comes. 

The families who skip this kind of planning tend to find out what it cost them only after it’s too late to fix — an heir discovering, at the worst possible moment, that a six- or seven-figure tax bill was entirely avoidable. Getting ahead of the cliff while there’s still runway is what turns that risk into a plan a family barely has to think about. 

Is Your Estate Near the Cliff? 

You don’t need to be a real estate developer or a founder who sold a company to end up near New York’s estate tax exemption. A paid-off home, a healthy retirement account, and a few decades of consistent saving can do it on their own — especially for a couple where most assets sit in one spouse’s name. 

A few signs it’s worth revisiting your plan: 

• Your combined net worth is within a few hundred thousand dollars of New York’s exemption, or you expect it to be within the next five to ten years. 

• One spouse owns most of the retirement accounts, the home, or the investment portfolio. 

• Your wills, trusts, or beneficiary designations haven’t been reviewed in five or more years. 

• You’re considering retiring to another state and aren’t sure whether your documents will still work. 

If any of that sounds familiar, a conversation with your financial advisor and estate attorney — together, not separately — is worth having sooner rather than later. 

Frequently Asked Questions 

What is New York’s estate tax exemption? 

New York’s estate tax exemption, known as the basic exclusion amount, is just over $7 million per person as of the most recent tax year and is adjusted for inflation annually. Estates below this amount generally owe no New York estate tax. 

What happens if my estate exceeds New York’s estate tax exemption? 

If a New York estate exceeds the exemption by more than 5%, the exemption is eliminated entirely and the whole estate becomes subject to New York estate tax — not just the amount above the threshold. This “cliff” design is unique compared to the federal estate tax, which only taxes the excess amount. 

Does New York have a gift tax? 

No. New York does not impose its own gift tax. However, the state adds back any gifts made within three years of death when calculating the size of the taxable estate. Gifts made more than three years before death are not included, which makes early, well-planned gifting a useful estate tax reduction strategy for New York residents. 

Can a revocable trust help me avoid New York estate tax? 

A revocable trust by itself does not reduce estate tax, since assets in a revocable trust are still counted as part of your taxable estate. What a revocable trust — often paired with a credit shelter (bypass) trust — can do is help each spouse fully use their own exemption and avoid probate, which is where much of the tax savings and administrative simplicity actually comes from. 

What is a credit shelter trust? 

A credit shelter trust (also called a bypass trust) is a trust funded at the first spouse’s death that keeps those assets outside the surviving spouse’s own taxable estate, while still allowing the survivor to benefit from the trust as trustee and beneficiary. It’s a core tool for making sure both spouses’ estate tax exemptions get used, since New York does not allow a surviving spouse to inherit an unused exemption from a deceased spouse. 

Should my IRA be owned by a trust? 

Not always. Retirement accounts like IRAs often work better passing directly to a named individual beneficiary through a beneficiary designation, rather than through a trust, because individual beneficiaries typically have more favorable distribution options. Many estate plans use disclaimer language instead, which lets a surviving spouse decide after the account owner’s death whether to keep the IRA outright or redirect a portion into a trust based on the actual tax picture at that time. 

How does New York’s Medicaid look-back period affect my estate plan? 

New York’s Medicaid look-back period for nursing home care is currently five years, and it can affect eligibility if assets were transferred or gifted shortly before applying for benefits. For families with substantial assets or long-term care insurance already in place, this look-back period is sometimes far less relevant than it would be for someone actively trying to qualify for Medicaid, but it should still be discussed as part of a full estate and long-term care review. 

How often should I update my estate plan? 

Most estate planning attorneys and financial advisors recommend a full review every three to five years, or immediately after a major life event — a significant change in net worth, a move to a new state, a marriage, divorce, birth, or death in the family. Tax laws and exemption amounts also change over time, which is another reason a plan that made sense a decade ago may no longer fit today. 

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Want to know where your own estate stands relative to New York’s exemption? Schedule a conversation with Justin Stevens, CFP^® to find out — before the gap becomes a tax bill. 

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