Is Inheritance Subject to Estate Tax In Arizona?

TABLE OF CONTENTS

What is Estate Tax?

Estate Tax vs. Inheritance Tax

Do Arizona Residents Have to Pay an Estate Tax?

Who Pays the Estate Tax, and When Is It Deducted?

Are Any Assets Exempt from Estate Taxes?

Other Factors to Consider When Dealing with Inheritance in Arizona

Need Help with Inherited Property? Contact Unbiased Options!

When a loved one dies, you often have to worry about handling their will and any inheritance they may leave behind. While this process can be challenging in the aftermath of someone’s passing, it’s also crucial to understand the different pieces involved to avoid any legal headaches down the line.

One crucial question to consider is whether you will owe any estate tax. The tax amount varies from state to state, so it matters where the person died and where their assets are. So, with that in mind, let’s look at Arizona and see whether it has an estate tax.

What is Estate Tax?

An estate tax is a tax levied by the government based on all the assets a person owns at the time of their death. Assets can include everything from real estate property, stocks and bonds, cash, annuities from life insurance, retirement accounts, and more. When calculating this tax, the government adds up all of these assets to determine whether it meets the minimum threshold.

In 2023, the threshold for an estate tax is $12.92 million. However, the rate is set to change in 2025, meaning the total will drop to $6.8 million. While that number may change in the coming years, it’s best to plan ahead, just in case.

The estate tax rate ranges from 18 to 40 percent, depending on the types of assets and how much they’re worth. In 2025, the maximum taxation will also increase to 45 percent, highlighting a need to plan accordingly now, not later.

Estate Tax vs. Inheritance Tax

It’s also crucial to note that estate taxes differ from inheritance taxes. With an estate tax, the balance is paid by the estate of the deceased. For inheritance taxes, the amount is paid by the beneficiary. Only six states levy inheritance taxes, and only Maryland charges both an estate and an inheritance tax.

The amount of an inheritance tax depends on the relationship of the person to the deceased. Typically, close family relatives (i.e., children and spouses) pay fewer taxes than those further removed, like friends or distant relatives.

Do Arizona Residents Have to Pay an Estate Tax?

Arizona residents have no state estate tax, as it was abolished in 2004. However, all Arizona residents are still subject to federal estate taxes. Also, remember that all assets are bundled into a single total, no matter where they are located. For example, if an individual owns homes in multiple states, the value of each property is added together for the federal tax.

Similarly, if an individual owns property or has assets in a state with estate taxes (only 12 states do), their estate must pay those taxes if they meet the minimum threshold. Arizona does not have an inheritance tax, either.

Who Pays the Estate Tax, and When Is It Deducted?

The executor of a person’s estate is responsible for paying these taxes before distributing any money or assets to heirs. It’s also up to the executor to verify how much a person owns and report that total to the IRS (and the state, if applicable). Once all assets are confirmed, the IRS calculates the tax amount and collects the money.

Are Any Assets Exempt from Estate Taxes?

The only time assets can be exempt from estate taxes is when they are placed into an irrevocable trust. In this case, you’re essentially placing your assets in the hands of a third party, who will manage and distribute them based on any rules or requirements you place on the trust when creating it.

For example, you may create an irrevocable trust that will pass property to a loved one after death. Or, maybe the trust pays a specific amount once the trustee (the person named as a beneficiary) meets certain requirements (i.e., they turn 18).

If you put assets into a revocable trust, they are still subject to estate taxes. The only reason an irrevocable trust is exempt is that you’re releasing your control over the asset. So, since you no longer own or manage the asset, it can’t be counted towards your estate.

Other Factors to Consider When Dealing with Inheritance in Arizona

Estate taxes are just one element of receiving an inheritance in Arizona. The entire process can be long and complicated, especially if the deceased did not have a will. Here are some elements that can affect the duration and complexity of the inheritance process:

  • Will – If the deceased had a will that named an executor, the executor is in charge of handling the estate, paying taxes, and distributing assets to beneficiaries. The state has to step in and name an executor if there is no will.
  • Probate – The probate process means that the court system has to verify the validity of a will and the executor of the estate. Probate is unnecessary for estates with less than $75,000 of personal assets and $100,000 of real assets (i.e., property). Also, assets with named beneficiaries can avoid probate. Examples include trusts, life insurance policies, retirement, and joint accounts.
  • Marriage – Arizona is a communal property state, meaning both spouses legally own any property or assets purchased during marriage. So, if one dies, the other spouse becomes the sole owner.
  • Children – Assets can be distributed evenly to the children of the deceased. If the deceased was married and children were involved from a separate relationship, the distribution amounts vary from one child to the next.

Need Help with Inherited Property? Contact Unbiased Options!

Navigating the legal proceedings of inheritance can be overwhelming if you don’t have help. Unbiased Options can assist with real estate matters so you can focus on other things. Contact us today for real estate consulting on your inherited property!

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