The increased federal estate tax exemption under the One Big Beautiful Bill Act may have reduced the number of estates subject to federal estate tax, but for married New York residents, credit shelter trusts remain an important planning consideration.
The federal estate and gift tax exemption increased to $15 million per individual in 2026 and indexes for inflation thereafter. For married couples, the availability of portability generally permits a surviving spouse to use a deceased spouse’s unused federal estate tax exemption provided an appropriate election is made. This requires that a timely filed Federal estate tax return, even when no federal tax is due. Late election relief is available for up to five years after date of death. These developments may lead some married couples to conclude that traditional credit shelter trust planning is no longer necessary. For New York residents, however, that conclusion could prove costly.
Unlike the federal estate tax system, New York does not permit portability of a deceased spouse’s unused estate tax exemption. In 2026, New York’s estate tax exemption is $7.35 million. If the first spouse dies leaving all assets outright to the surviving spouse, the deceased spouse’s unused New York exemption is effectively lost.
A credit shelter trust can preserve that exemption. Upon the first spouse’s death, assets up to the available New York exemption amount may be transferred into a trust for the benefit of the surviving spouse and/or other beneficiaries. If properly structured, those assets, including subsequent appreciation, will not be included in the surviving spouse’s taxable estate.
This planning is particularly valuable in light of the New York State estate tax “cliff.” When a taxable estate exceeds 105% of the applicable exclusion amount, the estate loses the benefit of the exemption entirely. For 2026, that threshold is $7,717,500.
Credit shelter trusts do involve trade-offs. Assets held in that trust generally do not receive a second income tax basis adjustment upon the surviving spouse’s death, potentially increasing capital gains taxes for beneficiaries. Accordingly, estate tax savings should be weighed against potential income tax consequences.
Although federal portability has simplified estate planning for many couples, it does not address New York’s separate estate tax regime. Married New York residents, particularly those with combined estates exceeding the state exemption, should periodically review their estate plans to determine whether credit shelter trust provisions could help minimize future estate tax exposure while preserving flexibility for the surviving spouse.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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