New York Estate Tax: ILIT vs Irrevocable Real Estate Trust

Here is the math on one family.

The family: a $12,000,000 building in Westchester

Elaine and Mark are in their late sixties, married, with two children and four grandchildren so far. Their net worth is about $40,000,000. They own an apartment building they bought decades ago.

Why New York makes this urgent

New York's estate tax is harsher than the federal one in three ways.

• Lower line. The New York exemption is $7,350,000 per person in 2026. The federal exemption is $15,000,000 per person, $30,000,000 per couple.
• No portability. The surviving spouse cannot use the first spouse's unused New York exemption.
• The cliff. An estate more than 5% over the line loses the whole exemption. New York then taxes it from the first dollar, up to 16%.

Because New York's tax is deductible on the federal return, the combined top rate is 16% + 40% × 84% = 49.6%. For Elaine and Mark, every extra dollar in the estate costs their heirs about 50 cents.

Option 1: sell for cash

One check the year they close: $2,025,156 of tax, including $631,500 to New York State. The losses get used, but all at once against one giant year of income. They keep $9,974,844, and all of it stays in the estate at a 49.6% top estate tax rate.

Option 2: structured installment sale + losses + ILIT

The buyer pays over 20 years at 6%: $1,046,215 a year. Gain is taxed only as it is received. Each payment's slice of gain is passive income, so under §469(g)(3) the suspended losses release against it, dollar for dollar. The interest is still taxed every year.

The losses run out in year 10. That $1,414,538 is about $141,000 a year of tax Elaine and Mark never pay.

They gift about $150,000 a year to an ILIT, and the trustee buys a $10,000,000 survivorship policy. The gifts fit inside the annual exclusion: $19,000 per person per beneficiary in 2026, or $38,000 per child or grandchild for a couple, with Crummey withdrawal rights. They allocate GST exemption to each gift on Form 709 so the trust can run for grandchildren, including ones not born yet.

When the second of them dies, the $10,000,000 goes to the trust income tax free under §101(a). It is outside their estate, because the trust bought and owns the policy. Inside the estate, that same $10,000,000 would have cost about $4,960,000 in estate tax.

> Money the IRS never got pays for money the IRS never gets.

Why not put the building in an irrevocable trust?

Same family, same building, two ways to use a trust.

Where the real estate trust does win. It moves future growth out of the estate, and New York has no gift tax, so a gift that survives the three-year add-back escapes New York estate tax.

With a grantor trust, the parents' suspended losses still work and they pay the trust's income tax, which moves even more to the kids. For a family that never needs the building's income and has exemption to spare, a grantor trust that sells on an installment sale can remove more than a policy does.

Where the ILIT wins. For a seller who wants the money, it does more with less. The seller keeps the payments, keeps the federal exemption, and turns about $1,400,000 of tax they never paid into $10,000,000 nobody taxes. A large estate can also do both.

Don't want another building to manage? Add a DST

If the seller doesn't want another property, they can exchange part of the sale into a Delaware Statutory Trust, which counts as like-kind replacement property for a 1031 and is run by a sponsor. The rest goes on the installment sale, where the losses cancel the gain and the saved tax keeps paying the premium.

DST interests are illiquid, often for 5 to 10 years, and are sold as securities, so read the offering first. More on how a Delaware Statutory Trust works.

Does this fit your sale?

It works when:

• The property was a rental or other passive activity, so the gain is passive. Losses do not offset gain on a primary home or raw land held for investment.
• You have suspended passive losses on your return (Form 8582 shows them).
• Your estate is above the New York line ($7,350,000 each), or above $15,000,000 each federally.
• You are insurable, and you can sell on terms with a creditworthy buyer or a structured payout.

Start with the structured installment sale basics, or have Hans run your own numbers.

Assumptions

2026 federal brackets, a 6% interest rate over 20 years, and a $30,000,000 federal exemption per couple. New York State income tax is estimated, including the high-income flat-rate recapture. New York City tax is not included; it adds up to 3.876%.

The $150,000 a year premium for a $10,000,000 survivorship policy is an assumption for healthy insureds in their late sixties, not a quote. The estate tax figure is $10,000,000 at the 49.6% combined top rate. The trust comparison assumes 4% yearly growth and a later sale taxed at about 34%.

Confirm the current New York exemption and the three-year add-back window with your estate attorney.

Hans Goldstein is an Enrolled Agent, admitted to practice before the IRS, and a licensed life insurance agent. This is general education, not tax or legal advice for your situation. Insurance is placed through Goldstein & Co. LLC dba Goldstein Insurance Services, CA license 4273294. Hans may earn a commission if a policy or structured sale is placed through him.