Does Arizona Have Inheritance and Estate Taxes?
Questions about taxes on estates are common during the estate planning process and during probate administration of an estate. While the State of Arizona does not impose an inheritance tax or an estate tax, an Arizona estate and the beneficiaries or heirs of an estate may still owe taxes in some circumstances.
The complexity of an estate, as well as the nature, valuation, and location of the assets in the estate, determine whether the estate, beneficiaries, or heirs are subject to tax.
An inheritance tax is a tax levied by a state government on a beneficiary or heir who inherits assets from an estate. Arizona does not impose an inheritance tax, but some other states do. As a result, beneficiaries or heirs who reside in Arizona do not pay an inheritance tax, but beneficiaries or heirs who reside in another state may be subject to an inheritance tax in their residence state.
In many cases, even if a beneficiary resides in a state that imposes an inheritance tax, there may be estate planning strategies that can avoid the tax. Out-of-state beneficiaries are an issue to address with your estate planning attorney.
While a beneficiary or heir may not owe inheritance tax, there are circumstances in which tax may be due on inherited property, due to the nature of the asset. For example, an individual who inherits assets in an Individual Retirement Account (IRA) or 401(k) account pays income tax on withdrawals from the account. In addition, strict limitations and special risks apply to certain inherited retirement accounts. These assets require special attention in an estate plan, because of the tax and other issues that arise when the assets are inherited. Other specific assets may be similarly affected.
An estate tax is completely different from an inheritance tax. Estate tax is a tax imposed on and payable by a decedent’s estate. Arizona does not impose an estate tax on a decedent’s estate. However, there are two situations in which an estate may still owe estate tax.
While Arizona does not levy a state estate tax, some states do impose estate tax. So, if an estate includes real property located in another state, the state where the property is located may impose an estate tax on that property. In some situations, the out-of-state property also may be required to go through probate in the state where it is located.
In addition to state estate taxes, a federal estate tax applies to all estates in the United States. However, a federal estate and gift tax liftime exemption means that many estates will not owe any federal estate tax. For the year 2022, the federal estate and gift tax lifetime exemption amount is $12.06 million for an individual and $24.12 million for married couples. The exemption amount is adjusted annually for inflation.
Under federal legislation, the federal estate and gift tax lifetime exemption increased substantially in January 2018, which had an immediate and significant impact on estate and gift tax planning. However, the new higher exemption levels expire at the end of January 2025, unless the United States Congress and President extend the effective date. The pre-2018 exemption levels (which will be restored in 2025 absent legislative action) were slightly less than half of the level of the current exemptions. And, of course, federal legislative enactments can change the federal estate tax exemption level prospectively at any time.
For most estates, the personal representative’s duties include filing federal and state estate tax returns (also referred to as fiduciary income tax returns) and paying tax on income (and sometimes capital gains) of estate assets. The duty to file tax returns and tax liability may exist even if an estate does not go through probate.
In some estates and for certain types of assets, other taxes may be payable by the estate or by a beneficiary or heir who inherits an asset. Guidance of a probate attorney is essential in all matters relating to taxes payable by an estate, beneficiary, or heir.
Tax issues are a complex matter that vary for different estates and assets. Potential taxes are an important matter that should be discussed with your estate planning lawyer as part of determining the structure of your estate plan.
Other Estate Fees and Costs
A decedent’s estate pays other fees and costs of probate and estate administration. The level of those expenses depends on the nature, complexity, and extent of the estate, as well as the types of the assets in the estate.
Under Arizona law, the personal representative of an estate may receive reasonable compensation for fulfilling their responsibilities in probate administration of an estate. Family members who serve as the personal representative sometimes waive the right to compensation.
In many cases, the personal representative retains a knowledgeable probate lawyer to ensure that all Arizona legal requirements for probate and estate administration are satisfied. Arizona probate lawyers typically charge an hourly rate for handling an estate, although an attorney may charge a flat fixed fee in some circumstances.
Estate fees and costs, including court and filing fees, are generally higher if assets in an estate must go through the probate process, which is one reason why some individuals wish to avoid probate. The personal representative also may need to hire other professionals for some aspects of the probate administration process, such as an appraiser, surveyor, accountant, or tax professional. In addition, the court may require a probate bond for the personal representative. Generally, the fees and expenses associated with probate administration are paid by the estate.
Taxes and Estate Planning
Questions and concerns about estate taxes, fees, and costs, as well as taxes for beneficiaries or heirs, are very important matters to discuss with an experienced estate planning attorney before you decide on the best structure for your estate plan. The complexity of tax issues varies greatly, depending on the nature of an individual’s estate and asset types. Every estate has a unique combination of assets that must be taken into account in the planning process.
Minimizing taxes and estate administration expenses should be an important part of your estate planning goals. These complex issues are just one of many important reasons why you should consult a knowledgeable estate planning lawyer and never attempt to create your own estate plan. Your attorney takes into account all your personal and financial circumstances and goals, including those unrelated to taxes and costs.
Schedule a Free Consultation With an Experienced East Valley Estate Planning Attorney
At Peterson Law Offices, estate planning is a primary focus of our practice. Minimizing estate taxes and expenses is always an important goal for our clients. If you don’t have an estate plan, we help you put one in place that fully addresses all your goals and circumstances. If you already have an estate plan, we can help with updating your plan or reviewing it to make sure it is current and takes full advantage of opportunities to save on taxes and expenses.
We provide top-quality services at affordable prices and welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.