As estate planning attorneys serving families from our Hauppauge office, we are often asked whether creating a trust can reduce estate taxes. The answer depends on the type of trust, the structure of your assets, and whether you are subject to New York estate tax, federal estate tax, or both.
Many Suffolk County families assume that simply having a revocable living trust will eliminate estate taxes. That assumption is not accurate under New York law. However, when designed properly, certain trusts can significantly reduce or even eliminate estate tax exposure. The key is understanding how New York and federal tax law treat different trust structures.
Understanding New York Estate Tax Law
New York imposes its own estate tax under New York Tax Law Article 26. The taxable estate is generally based on the federal gross estate, with New York modifications, as described in New York Tax Law § 954. The estate tax exemption amount is set under New York Tax Law § 952(c) and adjusted periodically for inflation.
One critical feature of New York’s system is the 105% “estate tax cliff.” If your taxable estate exceeds 105% of the exemption amount, the exemption phases out entirely. As a result, proper structuring can make the difference between owing no estate tax and owing tax on the entire estate.
A trust can help reduce estate taxes only if it removes assets from your taxable estate under applicable law. Simply placing assets into a revocable trust will not achieve that goal, because assets in a revocable trust remain part of your taxable estate.
Revocable Trusts And Estate Taxes
A revocable living trust is commonly used in estate planning to avoid probate. Under both federal law and New York Tax Law § 954, assets in a revocable trust are still considered owned by the person who created the trust for estate tax purposes.
That means a revocable trust does not reduce estate taxes. It may simplify administration, maintain privacy, and avoid probate in Suffolk County Surrogate’s Court, but it does not remove assets from your estate.
For families concerned about estate taxes, we often explain that revocable trusts are administrative tools, not tax reduction vehicles.
Irrevocable Trusts And Estate Tax Reduction
Irrevocable trusts are structured differently. When properly drafted and funded, they can remove assets and future appreciation from your taxable estate.
Under federal estate tax principles incorporated into New York’s system through New York Tax Law § 954, assets transferred to a properly structured irrevocable trust are generally excluded from your taxable estate if you relinquish sufficient control and comply with statutory requirements.
Examples include:
- Irrevocable life insurance trusts
- Grantor retained annuity trusts
- Spousal lifetime access trusts
- Qualified personal residence trusts
Each trust must be carefully structured. If you retain certain rights or powers, the Internal Revenue Code may cause inclusion of the assets in your estate, which would then flow into your New York taxable estate calculation.
Timing also matters. Although New York’s former three-year gift add-back rule under New York Tax Law § 954(a)(3) expired for deaths after January 1, 2019, lifetime gifting strategies still require thoughtful implementation.
Credit Shelter Trusts For Married Couples
Married couples in Suffolk County often benefit from credit shelter trusts, also called bypass trusts. While federal law allows portability of a deceased spouse’s unused exemption, New York does not provide the same portability framework under its estate tax statutes.
Without planning, a married couple could waste one spouse’s New York exemption. A credit shelter trust funded at the first spouse’s death can preserve that exemption amount and prevent it from being taxed at the second spouse’s death.
This strategy remains highly relevant for families whose estates approach the New York exemption threshold.
Trust Planning For Snowbirds
Many of our clients divide time between New York and Florida. Florida does not impose a state estate tax. However, if you remain domiciled in New York, your worldwide assets may still be subject to New York estate tax under New York Tax Law § 960.
Trust planning can work together with domicile planning. For example, irrevocable trusts may remove appreciation from the New York taxable estate, while Florida residency planning may reduce overall state tax exposure.
Establishing Florida domicile requires more than purchasing property. It requires consistent actions demonstrating intent to change your permanent residence. Trust planning should align with your residency strategy to avoid conflicts between state laws.
Asset Protection And Estate Tax Planning
Some trusts serve dual purposes. Certain irrevocable trusts can provide asset protection while also reducing estate taxes. For example, a properly structured spousal lifetime access trust may allow indirect access to trust assets while keeping future growth outside your taxable estate.
However, not every trust offers estate tax benefits. If structured improperly, assets may remain includable in your estate under federal estate tax rules, which would affect New York estate tax calculations as well.
Careful drafting is essential to ensure compliance with both federal tax law and New York statutory requirements.
When Should You Consider A Trust For Tax Planning?
Trust planning becomes particularly important when:
- Your net worth approaches the New York estate tax exemption.
- You own appreciating real estate in Suffolk County.
- You have significant retirement or investment accounts.
- You own a closely held business.
- You plan to change residency to Florida.
Trusts are not one-size-fits-all solutions. The structure must reflect your asset composition, family dynamics, and long-term objectives.
Living Trust Frequently Asked Questions
Can A Revocable Living Trust Reduce Estate Taxes In New York?
No. A revocable trust does not remove assets from your taxable estate. Under New York Tax Law § 954, assets you control or can revoke are included in your estate for tax purposes.
What Type Of Trust Can Reduce Estate Taxes?
Irrevocable trusts may reduce estate taxes if properly structured. These include irrevocable life insurance trusts, grantor trusts, and certain residence trusts. The trust must be drafted so that you do not retain prohibited control or benefits.
Does New York Recognize Federal Portability Between Spouses?
New York does not follow federal portability in the same way. Without credit shelter trust planning, a spouse’s unused New York exemption may be lost at death.
Will Moving To Florida Eliminate Estate Taxes?
Florida does not impose a state estate tax. However, you must properly establish Florida domicile. If New York determines you remained domiciled in New York, your estate may still be subject to New York estate tax.
Are Gifts To An Irrevocable Trust Taxable?
Gifts may have federal gift tax implications depending on the amount and structure. Proper planning can use lifetime exemption amounts strategically. State law considerations must also be evaluated.
Can A Trust Protect My Home From Estate Taxes?
Certain structures, such as a qualified personal residence trust, may remove future appreciation from your estate. However, there are strict rules governing continued use and timing.
How Often Should I Review My Trust?
We recommend reviewing your trust every few years or whenever there is a significant change in assets, family structure, or tax law.
Schedule A Consultation With Bernard Law P.C.
At Bernard Law P.C., we work with individuals and families in Hauppauge and throughout Suffolk County to design estate plans that reflect originality, efficiency, and quality. Trust planning can be a powerful tool when properly structured under New York law. The right plan can preserve exemptions, reduce tax exposure, and protect your legacy for the next generation.
If you are concerned about estate taxes or would like to determine whether a trust could reduce your exposure, we invite you to schedule a consultation.
Call our Hauppauge estate planning attorney at Bernard Law P.C. at (631) 378-2500 to schedule a free consultation. Our office is located in Hauppauge, New York, and we proudly serve clients throughout Suffolk County.
