02 Jul The Estate Tax Trap That Only Triggers When the First Spouse Dies
A couple in New York has $15 million in combined assets. The husband dies first. No estate plan beyond a simple will that leaves everything to the wife.
At the federal level, the marital deduction means no estate tax is owed. And under current federal law, the wife can elect to carry over her deceased husband’s unused exemption, a concept called portability, to shelter up to $30 million combined when she eventually dies. So far, no problem.
Except New York doesn’t recognize portability. And New York has its own estate tax with its own exemption, roughly $7.35 million (in 2026), that works nothing like the federal system. The husband’s state-level exemption died with him. It’s gone. The wife now holds $15 million in her own name. At her death, her New York estate tax bill is approximately $1.3 million.
If the couple had planned ahead while both spouses were alive, the husband’s $7.35 million New York exemption could have been used at his death. The wife’s remaining estate of $7.65 million falls within her own $7.35 million exemption and the 5% cushion. Her New York estate tax: zero. Planning for this while both spouses were alive, would have saved this family approximately $1.3 million.
This is the mistake I keep seeing. The first spouse dies. The surviving spouse assumes everything is fine because the federal rules are generous. They don’t realize that the state rules are completely different.
The Federal Safety Net That Doesn’t Exist at the State Level
Under federal law, when the first spouse dies, the surviving spouse can “port” the deceased spouse’s unused estate tax exemption. In 2026, each person has a federal exemption of approximately $15 million. If the first spouse dies and uses none of that exemption, the surviving spouse can elect portability on a timely filed estate tax return (Form 706) and hold a combined federal exemption of roughly $30 million.
That election is a genuine safety net. It means a married couple doesn’t need pre-emptive planning to preserve the first spouse’s federal exemption. The portability filing does the work.
But portability is a federal concept only. Most states that impose their own estate tax, including New York and Massachusetts, do not recognize it. When the first spouse dies in one of these states, the state exemption is either used or lost. There is no carrying it forward. No second chance.
New York’s Cliff: Where the Math Turns Brutal
New York imposes a state estate tax with an exemption of approximately $7.35 million in 2026, indexed annually for inflation. That number is well below the federal exemption, but that’s not the only danger. An additional hammer is how New York treats estates that exceed it.
In most states, the estate tax only applies to the amount above the exemption. If the exemption is $7 million and you die with $8 million, you pay tax on $1 million. New York doesn’t work that way. If your taxable estate exceeds the New York exemption by more than 5%, you lose the entire exemption. The full estate is taxable from dollar one. This is called the cliff.
Put numbers on it. A surviving spouse in New York dies with $7.6 million. That’s above the exemption but within the 5% cushion (totaling $7,717,500 of exemption). The New York estate tax is zero. Now suppose she dies with $7.8 million, just $200,000 more. She’s crossed the 5% cushion. Now the cliff kicks in. The entire $7.8 million is taxable from the first dollar. Her New York estate tax jumps from zero to approximately $550,000.
A $200,000 difference in the size of the estate produced a six-figure difference in tax. That’s how the cliff works. And it catches families who think they’re “close enough” to the exemption to be safe.
Now combine the cliff with the portability problem. Husband and wife in New York have $15 million combined. Husband dies first, leaves everything to the wife. No advance planning. She now owns $15 million. She is so far over the cliff that her exemption is irrelevant. Her New York estate tax at death: approximately $1.86 million.
If instead the couple had planned ahead, the husband’s $7.35 million exemption could have been used at his death. The wife’s remaining estate of $7.65 million falls within her own $7.35 million exemption and the 5% cushion. Her New York tax: zero or close to it. Proper planning would have saved this family over $1.86 million in state estate taxes.
Even for smaller estates, the cliff creates risk. A New York couple with $10 million. Husband dies, everything to wife. She’s now over the cliff. Her New York estate tax is approximately $1.07 million. But with proper planning capturing the husband’s $7.35 million exemption, her taxable estate is $2.65 million, well below her own $7.35 million exemption. Her tax: zero. Getting ahead of the problem and planning beforehand saved the family approximately $1.1 million in estate taxes.
Massachusetts and Other States Without Portability
New York is not the only state where this trap exists. Massachusetts has one of the lowest estate tax exemptions in the country: $2 million. No portability.
For a couple in Massachusetts with $10 million in combined assets, the math is painful. Husband dies, leaves everything to wife. When she dies with the full $10 million, Massachusetts taxes the estate above $2 million. That leaves the couple with an estate tax bill of approximately $977,000. This could have been mitigated or possibly avoided altogether with proper planning during their lives.
Connecticut, Illinois, Oregon and other states all impose their own estate taxes separate from the federal level. For the states that also do not recognize portability, it is doubly painful. If your clients live in, own property in, or are domiciled in any of these states, the first spouse’s state exemption must be captured at death or it disappears.
The Filing Deadline That Gets Missed
Even at the federal level, portability is not automatic. The surviving spouse must elect it by filing a federal estate tax return (Form 706) for the deceased spouse, even if no federal tax is owed. The deadline is nine months after death, with a possible six-month extension.
Miss that deadline and the federal portability election is lost. The IRS has provided some relief for late filings, but the rules are narrow and the outcome is not guaranteed. The safe practice is to file the return within the deadline. Every time. Even when no tax is owed.
Why Waiting Is the Most Expensive Decision
The couples most at risk are the ones who know they need to update their plan but keep postponing it. They’ll get to it next quarter. After tax season. After the renovation.
Then the first spouse dies, and the surviving spouse learns three things at once. The state exemption is gone. If they planned before the first spouse’s death, they could have saved it, but now they’re out of time. And no amount of post-death planning can fix it.
At the federal level, portability gives you a second chance. At the state level, in New York, Massachusetts, and a dozen other states, there is no second chance. The exemption either gets used at the first death or it vanishes.
The cost of waiting can go well into the seven-figures. These are not hypothetical numbers. They are the actual tax bills that families receive because proper planning wasn’t done while both spouses were alive.
Have You and Your Spouse Used Both of Your Exemptions, or Just One?
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