Financial advisors focusing on the federal estate tax exemption may overlook a significant planning risk: State estate taxes can apply at far lower asset levels and create costly surprises for clients who own homes or split time in multiple states.
While the federal estate tax exemption is $15 million per person, some states impose estate taxes at much lower thresholds. New York's estate tax cliff begins at $7.35 million for 2026, while Oregon's exemption is $1 million. Most states, including California, don't have an estate tax.
One of the biggest planning considerations is domicile. When a client owns a home, has assets or spends time in more than one state, determining where they are legally domiciled can have major estate-tax consequences, lawyers told Financial Planning.
"Very often, state estate taxes are based on a question of domicile, which is a subjective test, and it's basically the state trying to figure out where did you intend to be," said Lawrence D. Mandelker, a New York-based partner who advises high net worth individuals on estate planning and more at law firm Venable. "If you're trying to change your domicile, you need to be very careful."
Clients and advisors tend to focus more on the federal exemption than state-level rules, but staying up to date on those rules is important, Mandelker added. Advisors should routinely ask clients about any major life changes, such as buying a vacation home or relocating, that could affect domicile, he said.
New York's estate planning cliff complicates planning
New York has a cliff range rather than an exemption, meaning estates are taxed based on how much they exceed the beginning of the cliff, which is $7.35 million for 2026. The top of the range is $7,717,500 for 2026, and the tax rate imposed by the state goes from 3.06% to 16%.
New York's tax authorities might try to charge state estate taxes if a person had a permanent abode in New York, even without being domiciled in New York for more than a certain number of days, said Kevin Matz, New York-based partner and co-leader of the family office industry group at law firm ArentFox Schiff.
In another scenario, if a couple lived in New York, and then one spouse died, the estate tax marital deduction could be useful to transfer assets without paying taxes. Then, the second spouse could potentially move out of state.
"If one were to know with certainty that if one spouse died, the other spouse would have a long runway to survive and then could plan to move out of state and thereby avoid New York state estate tax … that would allow [clients and advisors] to plan with certainty, but we don't have certainty. We have probabilities and possibilities," Matz said. "If one were to plan to move out of state but were to die before actually moving, New York state estate tax would then apply to that surviving spouse."
A. Michael Wargon, a Boca Raton, Florida-based partner at law firm Day Pitney who represents high net worth individuals on estate planning and more, suggested charitable donations as a strategy for clients who would otherwise go slightly over New York's exemption amount.
"The client's options at that point are to do some gifting," Wargon said, "which they maybe wouldn't otherwise do with a higher federal threshold or consider moving to a state with no state estate tax or a higher estate tax threshold."
State estate taxes can create filing, planning headaches
Even if taxes won't be due, depending on a client's specific situation, it's important to know whether the state has any filing requirements.
"In some other states like Massachusetts, for example, or Maryland, even if you're under the threshold, they do a proportionate calculation based on your overall estate to try to determine what your liability should be, and even if you don't have a liability, there's still a filing requirement in the state, so you're putting yourself back on the state's radar," Wargon said.
Estate planning strategies to consider include gifting assets or converting real property into intangible assets.
"So there's a lot of strategies that you still need to think about, even if your client is clearly not a resident of a state with a state estate tax," Wargon said.
Financial advisors should be aware of the tax rules in their clients' states so they can properly advise those clients.
"If you service clients in a particular state, you should be aware of the state estate tax that applies to them, both based on residence and also where their property is," Matz said. "Sometimes even if they don't live in a state, if someone who was a Floridian had real estate and tangible property — think in terms of old bullion or jewelry or artwork — in New York worth more than $7,350,000, even though they're a Floridan, they'd still be subject to New York state estate tax."
Advisors should also distinguish estate taxes from inheritance taxes. Some states, including Pennsylvania, Maryland and New Jersey, impose inheritance taxes on certain beneficiaries, depending on the beneficiary's relationship to the deceased person.
For some clients, tax liabilities influence domicile decisions
Clients might decide to move based on different states' tax laws, though other lifestyle factors are also at play. Those factors add up differently for each individual.
"When you first start practicing, your focus is just on tax," Wargon said. "How am I going to get the best tax result? And eventually, you realize that not everybody is driven by taxes, right? There are a whole host of other factors in people's lives that make a decision as to where they want to live and how they want to conduct their lives."
Still, tax considerations are significant for some clients, who might be interested in moving to a state such as Florida that doesn't charge state income taxes or estate taxes, Wargon added.
If a client decides to move for the tax advantages of another state, the previous state might challenge whether the client changed domicile or is just living part time in the new location.
Mandelker said if a client lives for six months and one day in Florida, New York might still argue the individual hasn't left the Empire State. However, if their Florida home is mansion-size versus a studio apartment in New York, then New York might say it's clear the individual lives in the Sunshine State and uses the studio as a place to stay when seeing a Broadway show, for example.
"If you are a high net worth individual that's paying hundreds of thousands or millions of dollars to New York in state and city income tax, and then you tell them, 'Hey, I've moved,'" Wargon said, "there's a very strong likelihood that they are going to look at your return and ask a lot of questions to determine that you no longer have the connections to the state that would warrant income tax applying to you."
Signing up for a grocery store card isn't enough to demonstrate having moved, Mandelker said. Clients should make other bigger changes, such as updating voter registration, joining a synagogue or church, or signing up for a tennis or golf club. He said completing these quickly after a move can be a good idea for clients when it comes to convincing tax authorities they've moved.
The timing of a move between states can also be difficult to nail down after the fact — and it can be the subject of an audit.
"I tell clients: If somebody were to wake you up in the middle of the night and ask you, 'Are you a New Yorker or a Floridian?' What are you going to answer?" Wargon said. "The state is trying to determine that state of mind and exactly when your mindset shifted and when you became a Floridian, and you left New York. … That's a little difficult to determine. There's no bright line under the domicile test."
Oftentimes, income tax audits are related to the timing of moves. The result may be a compromise, said Wargon. For example, a client's original state might penalize them for the year of the move, but that year only. Some clients see that as "losing the battle but winning the war," he said.
