New York’s Proposed $750,000 Estate Tax Exemption: A Warning Sign for Wealthy Families in High-Tax States

Published: March 2026 | Author: Riefkohl Law
Category: Estate Tax, State Tax Policy

New York City Mayor Zohran Mamdani recently proposed cutting the New York state estate tax exemption from approximately $7 million to $750,000 — a nearly 90% reduction — while simultaneously raising the top state estate tax rate from 16% to 50%. If enacted, it would give New York the lowest estate tax exemption and the steepest estate tax rate in the nation.

The proposal was not included in the state's pending budget bills, and it faces little political likelihood of immediate passage. But dismissing it entirely would be a mistake. This kind of proposal doesn't emerge in isolation, and the underlying fiscal pressures that produced it aren't going away.

What the Proposal Would Do

Under current New York law, estates valued at roughly $7 million or less are exempt from state estate taxes. New York already has a notoriously harsh "cliff" — if your estate exceeds the exemption by more than 5%, the entire estate is taxed from the first dollar, not just the amount above the exemption.

Mayor Mamdani's proposal would drop that exemption to $750,000 and raise the top marginal rate to 50%. The practical impact would be dramatic. A New York estate worth $1 million — which in the context of Manhattan real estate, retirement accounts, and life insurance is remarkably common — would suddenly owe state estate taxes. A $5 million estate could face hundreds of thousands of dollars in new tax liability. Combined with the existing cliff provision, the effect would be compounding.

Why It Matters Even If It Doesn't Pass

The proposal is a signal, not (yet) a law. But it reflects a broader trend that high-net-worth individuals and their advisors should be watching. Several states facing budget shortfalls are looking at estate and inheritance taxes as potential revenue sources. The logic is straightforward from a legislator's perspective: estate taxes are paid by the dead, which makes them politically easier to impose than income or sales taxes.

New York is not alone. Washington State just approved a new 9.9% income tax on personal income above $1 million, the state's first-ever income tax, and simultaneously reformed its estate tax rates. These are not isolated events — they're part of a pattern in high-tax states that are searching for new revenue.

For wealthy families in states like New York, California, Connecticut, and Washington, the risk isn't just one proposal. It's the trajectory. Estate tax exemptions that seem safe today may not remain safe tomorrow.

The New York Estate Tax Cliff

New York's estate tax cliff deserves special attention because it amplifies the impact of any reduction in the exemption. In most states with an estate tax, you only pay tax on the amount that exceeds the exemption. New York is different. If your estate exceeds the exemption by more than 5%, the exemption disappears entirely, and your entire estate is taxed.

Under current law, with a roughly $7 million exemption, this means an estate of $7.35 million loses the exemption entirely. If the exemption were reduced to $750,000, an estate of just $787,500 would trigger taxation on the full amount. For a state where the median home value in many neighborhoods exceeds $1 million, the math is alarming.

What High-Net-Worth Individuals Should Be Doing

Whether or not this specific proposal advances, the prudent response is the same: plan as though the rules could change, because they can.

Residency planning is increasingly critical. For individuals with the flexibility to establish domicile in a state without an estate tax — like Florida, Texas, or Puerto Rico — the savings can be substantial. Puerto Rico, in particular, offers unique advantages through its Act 60 framework, combining favorable tax treatment with a sophisticated trust and banking infrastructure.

Gifting strategies remain powerful tools. Transferring assets during your lifetime reduces the size of your taxable estate. Under the current $15 million federal exemption, most families can make substantial gifts without any federal tax consequences. State estate taxes are calculated based on the estate's value at death, so lifetime transfers reduce exposure on both fronts.

Trust planning is essential. Irrevocable trusts remove assets from your taxable estate permanently. Properly structured, they also provide asset protection, creditor shielding, and multi-generational wealth preservation. The key is acting before the legislative landscape shifts.

Life insurance audits are overdue for many families. Life insurance proceeds are included in the taxable estate unless the policy is owned by an irrevocable life insurance trust (ILIT). In a state with a low exemption, even a modest life insurance policy can push an estate over the threshold.

The Bigger Picture

The tension between federal generosity and state aggression is the defining feature of the 2026 estate planning landscape. The federal government just raised the exemption to $15 million. But state governments are moving in the opposite direction — some dramatically so.

For families in high-tax states, the federal exemption alone doesn't provide complete protection. State estate taxes can still impose significant liability, and state legislatures are far less predictable than Congress in this area.

The lesson from New York's proposal isn't that you should panic. It's that you should plan. The families who will be most affected by any future estate tax changes are the ones who haven't prepared for them.

Considering residency planning, trust structures, or estate tax strategies? Contact Riefkohl Law — serving clients in Puerto Rico and across the United States.

riefkohllaw.com | hans.riefkohl@riefkohllaw.com

This article is provided for educational and informational purposes only. It should not be construed as legal or tax advice. Consult with a qualified attorney or tax professional regarding your specific situation.