Estate Tax in Arizona – What You Need to Know

Book about estate tax Arizona.

Are wondering about the estate tax in Arizona? This guide should provide you with some clarity, giving you an understanding of what to expect in terms of taxes and how it might affect your financial plans.

What Are the Details of Arizona’s Estate Tax?

Arizona does not have a state estate tax. However, many taxes still apply to estates in the state. This includes any capital gains accrued by the person who passed away. The deceased person’s estate may be subject to federal estate taxes as well. Be sure to do your due diligence here and seek professional advice if needed.

What is the Federal Estate Tax?

The federal estate tax is a tax on the transfer of property after a person’s death. Depending on the value of the estate, you may be required to pay this tax as part of settling the estate. The federal estate tax rate can vary from year to year but generally ranges from 18 – 40%.

Are There Other Types of Taxes that Could Apply?

In addition to estate tax, there are other kinds of taxes that could apply depending on where you live and the asset in question. Income tax can affect distributions from a trust or inherited account.

Also, depending on state law, a trust may be subject to state and local taxes (SALT). Here are some examples:

State and Local Taxes (“SALT”) Based on Residency of the trustee

Several states — including Arizona, California, Montana, Oregon, and Virginia — tax a trust if one or more trustees reside in the state. Trust advisers and protectors who act in a fiduciary manner may be considered co-trustees. This could potentially expose a trust to extra state tax jurisdictions. California, for example, applies a broad definition of fiduciary, which includes “any person … acting in a fiduciary capacity” (Cal. Rev. & Tax. Code §17006). The individual need not be named a trustee or adviser or protector. He or she need only to act in a fiduciary manner to fall within the California definition. You can mitigate this issue by appointing nonresident trustees. Or you could the the resident co-trustee to resign, if the other co-trustees are nonresidents.

SALT Based on Residency of the beneficiary

Some states tax a trust if it has one or more resident beneficiaries. These states are California, Georgia, Montana, North Carolina, North Dakota, and Tennessee. Generally, these states only tax income attributable to the resident beneficiary. California taxes accumulated trust income when it’s distributable to the resident beneficiary. (McCulloch v. Franchise Tax Bd., 61 Cal. 2d 186 (1964)). Also, states may differ in their definition of beneficiaries. Beneficiaries may include mandatory beneficiaries, discretionary beneficiaries, and contingent remainder beneficiaries. Massachusetts, for example, includes unborn and unascertained persons. It also includes as persons with uncertain interests in its definition of resident beneficiaries. (Mass. Gen. Laws. Ch. 62, §10(a)).

Estate Planning Tips to Avoid Income Tax issues.

Estate planning is an important part of ensuring your wishes are met while protecting your heirs from any unnecessary tax burden. Here are a few quick tips to help you plan your estate more efficiently:

  • create a will or living trust,
  • review life insurance policies,
  • and make sure investments are properly titled.

Taking the time to do thorough research and planning can help you ensure your estate is handled in a way that minimizes tax liability for you and your heirs.

Conclusion.

Even though Arizona does not have an estate tax, other taxes could be applicable. State and local taxes are an increasing issue in estate planning.

If you want to avoid unnecessary taxes, give us a call at 602-443-4888. Or send us a message using our Contact Form. We’re here to help.

ABOUT THE AUTHOR

Founding attorney Paul Deloughery has been an attorney since 1998, became a Certified Family Wealth Advisor. He is also the founder of Sudden Wealth Protection Law.

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