Credit Shelter Trust & Marital QTIP Trust — New York Estate Planning
Last updated: April 2026
If you are married and live in New York, simply leaving everything to your surviving spouse can waste one spouse’s entire New York estate tax exemption — because New York does not allow portability. When the first spouse dies and everything passes outright to the survivor, the first spouse’s exemption is lost forever. The surviving spouse’s estate is then taxed using only one exemption, and if the combined estate exceeds the threshold, the family faces a tax bill that proper planning would have eliminated.
A Credit Shelter Trust and Marital QTIP Trust — used together — preserve both spouses’ exemptions and can save a New York family hundreds of thousands of dollars in estate taxes.
Call toll-free: (888) 275-2620. Available 24/7.
The Problem: No Portability in New York
At the federal level, when one spouse dies, the surviving spouse can claim the deceased spouse’s unused estate tax exemption through a portability election on Form 706. The federal exemption for 2026 is $15 million per individual — $30 million for a married couple using portability.
New York does not have portability. The New York basic exclusion amount (BEA) for deaths in 2026 is $7,350,000 per person. If the first spouse dies and leaves everything outright to the survivor, the first spouse’s $7,350,000 New York exemption disappears. When the second spouse dies, only one exemption — $7,350,000 — shelters the combined estate. For a couple with a combined estate of $12 million, this means approximately $4.65 million is exposed to New York estate tax that could have been sheltered.
The Credit Shelter Trust and Marital QTIP Trust solve this problem.
How the Two-Trust Structure Works
When the first spouse dies:
The estate is divided into two trusts. The Credit Shelter Trust (also called a bypass trust or family trust) is funded with an amount equal to the New York basic exclusion amount — $7,350,000 for 2026 deaths. This amount passes free of both federal and New York estate tax because it falls within the first spouse’s exemption. The assets in the Credit Shelter Trust are permanently outside the surviving spouse’s taxable estate. They will not be taxed again when the surviving spouse dies.
The remainder of the estate flows into the Marital QTIP Trust (Qualified Terminable Interest Property Trust). The QTIP Trust qualifies for the unlimited marital deduction under IRC § 2056(b)(7), which means the assets pass to the surviving spouse’s benefit without triggering estate tax at the first death. The tax is deferred until the surviving spouse dies.
During the surviving spouse’s lifetime:
The surviving spouse receives all income from the QTIP Trust (this is a requirement under § 2056(b)(7) — the surviving spouse must receive all income at least annually). The surviving spouse may also receive income from the Credit Shelter Trust, and distributions of principal for health, education, maintenance, and support (HEMS standard) may be permitted from either or both trusts, depending on how they are drafted. The surviving spouse has financial security while both trusts remain protected.
When the surviving spouse dies:
The Credit Shelter Trust passes to the ultimate beneficiaries — typically children — without any estate tax, because those assets were already sheltered by the first spouse’s exemption and have been outside the surviving spouse’s taxable estate the entire time. Any growth in the Credit Shelter Trust is also tax-free.
The QTIP Trust is included in the surviving spouse’s taxable estate. However, the surviving spouse’s own exemption ($7,350,000 for 2026) now shelters those assets. Between the two trusts, the couple has used both exemptions — potentially sheltering $14,700,000 from New York estate tax instead of $7,350,000.
The New York Estate Tax Cliff
New York’s estate tax has a unique and punishing feature known as the “cliff.” If a decedent’s taxable estate exceeds 105% of the basic exclusion amount, the entire exemption is lost — not just the excess. For 2026, the cliff threshold is $7,717,500 (105% of $7,350,000).
An estate of $7,300,000 owes zero New York estate tax. An estate of $7,800,000 — only $500,000 more — owes estate tax on the entire $7,800,000, potentially exceeding $700,000 in tax. The family with the slightly larger estate ends up with less money after tax than the family with the smaller estate.
The Credit Shelter Trust and QTIP Trust structure directly addresses the cliff. By funding the Credit Shelter Trust at exactly the BEA amount, you ensure that neither the first spouse’s estate nor the surviving spouse’s estate exceeds the cliff threshold unnecessarily. Careful drafting — including formula clauses that adjust the funding amount to equal the BEA in effect at the date of death — ensures the plan works regardless of future changes to the exemption amount.
The Santa Clause — Charitable Cliff Protection
For estates that are close to the cliff threshold even after using the two-trust structure, a “Santa Clause” provision can provide additional protection. This is a formula clause in the will or trust that directs any amount exceeding the cliff threshold to a qualified charity. The charitable bequest qualifies for the estate tax charitable deduction, pulling the taxable estate back below the cliff. The result: the charity receives a gift, and the family keeps more than they would have if the full estate had been taxed. This provision only activates if the estate exceeds the cliff threshold — if the estate is below it, no charitable gift is required.
New York QTIP Election
For decedents dying on or after April 1, 2019, New York requires a separate QTIP election on the New York estate tax return (Form ET-706). This is independent of any federal QTIP election. The executor must affirmatively make the New York QTIP election — it is not automatic. Failing to make the election on the state return can disqualify the QTIP Trust from the New York marital deduction, which would defeat the purpose of the entire structure. This is an area where executor education and attorney oversight at the time of administration are critical.
Three-Year Gift Clawback
New York does not impose a gift tax, but any taxable gift made within three years of the decedent’s death is added back to the New York taxable estate. This means that last-minute gifting to reduce the estate below the BEA or the cliff threshold can backfire if the decedent dies within the three-year window. Effective gifting strategies must begin well in advance. Gifts made more than three years before death are excluded from the New York estate calculation entirely.
2026 Exemption Amounts — Federal and New York
Federal estate tax exemption (2026): $15,000,000 per individual / $30,000,000 per married couple (with portability). Made permanent by the One Big Beautiful Bill Act of 2025.
New York basic exclusion amount (2026): $7,350,000 per individual. No portability. Adjusted annually for inflation.
New York cliff threshold (2026): $7,717,500 (105% of $7,350,000). Estates above this amount lose the entire exemption.
Federal annual gift tax exclusion (2026): $19,000 per recipient ($38,000 for married couples splitting gifts).
The massive gap between the federal exemption ($15 million) and the New York exemption ($7.35 million) means that many New York families face zero federal estate tax but substantial state estate tax. This makes New York-specific planning — particularly the Credit Shelter Trust / QTIP Trust structure — more important than ever.
Key Benefits of the Two-Trust Design
Preserves both exemptions. Both spouses’ New York BEA amounts are used — potentially sheltering $14.7 million instead of $7.35 million.
Defers estate tax. The QTIP Trust defers tax on the marital share until the second death, keeping assets available for the surviving spouse’s lifetime.
Protects against the cliff. Formula funding clauses keep each estate at or below the BEA, avoiding the cliff penalty.
Creditor and remarriage protection. Assets in the Credit Shelter Trust are not part of the surviving spouse’s estate and are protected from the surviving spouse’s creditors. If the surviving spouse remarries, the Credit Shelter Trust assets remain designated for the original beneficiaries (typically children from the first marriage).
Growth outside the estate. Any appreciation in the Credit Shelter Trust assets after the first death is not included in either spouse’s taxable estate.
What to Consider Before Implementing
Exemption amounts change annually. The plan should use formula clauses that reference the BEA in effect at the date of death, not fixed dollar amounts, so the plan automatically adjusts.
Trust drafting must be precise. The QTIP Trust must meet the requirements of IRC § 2056(b)(7) — the surviving spouse must receive all income at least annually, and no other person may have a power to appoint the property to anyone other than the surviving spouse during the surviving spouse’s lifetime. Drafting errors can disqualify the marital deduction.
Trustee selection matters. Both trusts require active administration — investment management, tax return filing (the Credit Shelter Trust files its own Form 1041), required distributions, and accounting. The choice of trustee — individual, institutional, or a combination — should be discussed carefully.
Coordination with other planning. The two-trust structure should be coordinated with beneficiary designations on retirement accounts and life insurance, existing irrevocable trusts, jointly held property (which may bypass the will entirely), and powers of attorney and healthcare proxies.
Multi-state considerations. If you own property in another state, or if you split time between New York and another jurisdiction, the interplay between state estate tax systems must be addressed.
How We Help
We draft Credit Shelter Trusts and Marital QTIP Trusts as part of comprehensive estate plans for married couples in New York. Our work includes evaluating whether the two-trust structure is appropriate based on your estate size, asset composition, and family circumstances, drafting the trusts with formula clauses that adjust to current exemption amounts, coordinating the trusts with your existing beneficiary designations and asset titling, advising on the New York QTIP election requirements so the executor is prepared at the time of administration, and reviewing the plan periodically as exemption amounts change and family circumstances evolve.
Attorney Cook holds an LL.M. in Taxation and has been drafting estate plans for New York families for over 25 years. Learn more about our estate planning practice.
Contact Us
Call toll-free: (888) 275-2620. Available 24/7.
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Last reviewed by Attorney Ronald S. Cook — April 2026
This page is for informational purposes only and does not constitute legal advice.
