There is a moment of relief that comes when a client reads a Will and sees their name listed as a beneficiary. “I leave my home in Queens to my daughter, Sarah.” In that moment, the transfer feels simple, direct, and complete.
But then comes the question that keeps beneficiaries awake at night: “Will I have to pay taxes on this?”
The answer, unfortunately, is not a simple “Yes” or “No.” It is a labyrinth of federal and state laws that depend heavily on where you live, what you inherited, and how much it is worth. In New York State, the answer is particularly complex because we live in one of the few jurisdictions that still imposes a heavy levy on the transfer of wealth.
I am Russel Morgan, and at Morgan Legal Group, we have spent over 30 years guiding families through the minefield of New York tax law. We have helped over 1,000 clients navigate probate and estate administration, saving millions of dollars in unnecessary taxes along the way. In this cornerstone guide, I will clarify the crucial difference between “Inheritance Tax” and “Estate Tax,” explain the terrifying “New York Tax Cliff” facing us in 2026, and show you exactly how to protect your family’s windfall.
1. The Big Distinction: Inheritance Tax vs. Estate Tax
To understand if your inheritance is taxable, you must first understand who is being taxed. These two terms are often used interchangeably, but legally, they are opposites.
What is Inheritance Tax?
Inheritance Tax is a tax levied on the beneficiary (you) after you receive the money. It is based on who you are related to the deceased.
The Good News for New Yorkers: New York State DOES NOT have an inheritance tax.
If your aunt leaves you $100,000 in cash, New York State does not send you a bill for receiving it. You do not report it as “income” on your personal tax return (Form IT-201).
What is Estate Tax?
Estate Tax is a tax levied on the deceased’s estate before the money is ever distributed to you.
The Bad News for New Yorkers: New York State has one of the most aggressive Estate Taxes in the country.
So, while you (the beneficiary) don’t write the check, the check is written from the inheritance before it gets to you. If your aunt left a $10 million estate, the government might take a significant portion off the top, leaving you with less than intended. Effectively, your inheritance is reduced by taxes, just indirectly.
2. The New York Estate Tax “Cliff”: The 2026 Trap
If there is one section of this guide you memorize, make it this one. This is the unique feature of New York law that catches thousands of families off guard.
The Exemption Amount
As of 2026, New York allows an individual to pass approximately $6.94 million (adjusted for inflation) tax-free. If the estate is worth less than this, there is usually no NY Estate Tax.
The “Cliff” Mechanism
In the Federal system, if you go $1 over the limit, you pay tax on that $1.
In New York, if the estate exceeds the exemption by more than 5%, you fall off the cliff.
The Consequence: You are taxed on the ENTIRE ESTATE, starting from dollar one. You lose the exemption completely.
A Hypothetical Scenario: The Cost of Success
Imagine your father passed away owning a brownstone in Brooklyn and an investment portfolio.
- Scenario A: His estate is worth $6.9 million. Tax: $0.
- Scenario B: His estate is worth $7.5 million (just slightly over the cliff). Tax: ~$650,000+.
Because he had that extra bit of wealth, the state confiscates a massive sum. This is why estate planning in New York is not just about documents; it is about mathematical precision. At Morgan Legal Group, we use “Santa Claus Clauses” in our Wills to donate the excess amount to charity, keeping the estate under the cliff and saving the family hundreds of thousands in taxes.
3. The Federal Sunset: Why 2026 Changes Everything
While we focus on New York, we cannot ignore the IRS. For the last decade, the Federal Estate Tax exemption has been historically high (over $13 million per person). This meant only billionaires worried about federal tax.
The Sunset: On January 1, 2026, the provisions of the Tax Cuts and Jobs Act (TCJA) expire. The federal exemption will be cut roughly in half (projected to be ~$7 million).
The Impact: Suddenly, successful professionals, business owners, and homeowners in the NYC metro area are facing a 40% Federal Tax on top of the 16% NY State Tax. If you inherit a large estate in 2026 without prior planning, nearly half of it could go to the government.
4. The Hidden Taxes: It’s Not Just About Cash
Even if the estate is under the “Cliff,” your inheritance might still be subject to other types of taxes. Not all assets are created equal.
Income Tax on Retirement Accounts (IRD)
This is the most common surprise.
If you inherit a Traditional IRA or 401(k), that money has never been taxed. When you withdraw it (which you are generally required to do within 10 years under the SECURE Act), you must pay Income Tax on every dollar.
Example: You inherit a $1 million IRA. You live in NYC and are in a high tax bracket. You might lose 40%–50% of that inheritance to federal, state, and city income taxes as you withdraw it.
Capital Gains Tax (The Step-Up Basis)
This is the “good” news.
If you inherit Real Estate (like a home) or Stocks, you receive a “Step-Up in Basis.”
How it works: Mom bought the house in 1980 for $50,000. It is worth $1 million when she dies.
- If she gave it to you while alive, and you sold it, you would pay Capital Gains tax on $950,000 of profit.
- Because you inherited it at death, your “basis” steps up to $1 million. If you sell it immediately for $1 million, Capital Gains Tax is $0.
This is why we often advise clients not to transfer their homes to their children during their lifetime without consulting an expert attorney.
5. Life Insurance: Is It Taxable?
Generally, life insurance proceeds received by a beneficiary are Income Tax-Free. If you get a $500,000 check from MetLife, you don’t report it to the IRS.
However, the value of the policy is included in the deceased’s “Taxable Estate” for Estate Tax purposes.
The Trap: Your dad had $6 million in property and a $2 million life insurance policy. He thinks he is under the NY exemption. But the insurance pushes his total estate to $8 million. He falls off the NY Cliff. The estate owes massive taxes.
The Solution: An Irrevocable Life Insurance Trust (ILIT). We move the policy into a trust so it does not count toward the taxable estate.
6. Out-of-State Inheritance: The “Situs” Rule
What if your inheritance comes from outside New York?
While NY has no inheritance tax, six states do (Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania).
If your grandmother lived in Pennsylvania and left you money, Pennsylvania might tax that inheritance before it gets to you, even if you live in New York. Always consult with counsel regarding the laws of the state where the deceased resided.
7. Strategies to Protect Your Inheritance
At Morgan Legal Group, we don’t just identify taxes; we eliminate them. Here are the strategies we use for our clients:
Credit Shelter Trusts
For married couples, we can structure their Wills and Trusts to ensure they utilize both spouses’ exemptions. This can effectively protect nearly $14 million from New York Estate Taxes.
Spousal Lifetime Access Trusts (SLATs)
To prepare for the 2026 Sunset, we help clients move assets into irrevocable trusts now, locking in the current high federal exemptions before they disappear.
Charitable Planning
If an estate is slightly over the “Cliff,” leaving the excess to a charity can save the family more money in taxes than the value of the gift itself.
Conclusion: Knowledge is Your Best Defense
So, is your inheritance subject to state taxes?
Technically, no—you won’t receive a bill for “Inheritance Tax” in New York.
Practically, yes—the “Estate Tax” and the “Cliff” can erode the legacy left to you by 16% to 50% if proper planning was not in place.
Don’t let the IRS or New York State become the primary beneficiary of your family’s hard work. Whether you are planning your own estate or navigating the probate process for a loved one, you need a strategy that accounts for the 2026 laws.
Protect what is yours. Schedule a consultation with Morgan Legal Group today. Let us do the math so you can enjoy the peace of mind.
For specific tax rates and tables, refer to the New York State Department of Taxation and Finance Estate Tax official page.
