Estate planning involves understanding both federal and state-level regulations. Arizona residents, you’re in luck on one level. The Grand Canyon State does not impose a state estate tax.
However, that doesn’t mean you’re completely off the hook. If you own property in a state that does have an estate tax, you may still owe money to that jurisdiction. Let’s delve into the details.
Arizona: A State Without an Estate Tax
Firstly, let’s clear the air. Arizona has no state estate tax, so if you’re a resident and own all your assets within the state, your estate won’t face any additional taxation beyond the federal estate tax, if applicable. This makes Arizona an attractive location for retirees and others interested in legacy protection. But don’t let this lull you into a false sense of security.
Beware of Other State-Level Estate Taxes
While Arizona may not have a state estate tax, 12 states and the District of Columbia do. The states with their own estate tax as of 2023 are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington.
If you own real estate or other tangible property in any of these states, your estate may be subject to their state estate tax, depending on the value of the property and the state’s specific tax laws.
Oregon As a Case Study
Let’s use Oregon as an example. The state has an estate tax exclusion amount of $1 million. If the value of your Oregon-based property exceeds this amount, your estate would be subject to Oregon’s estate tax. The rate ranges from 10% to 16%, depending on the value of the assets located in Oregon.
Say you’re an Arizona resident but own a vacation home in Oregon worth $1.2 million. Upon your death, the Oregon property would trigger an Oregon state estate tax because it exceeds the $1 million exclusion.
Federal Estate Tax Parameters
While we are on the subject of estate taxes, we should provide some information about the federal tax. It carries a maximum rate of 40%, so it can take a huge chunk out of your wealth if you have been very successful from a financial perspective.
This tax is only a factor for high net worth individuals because the exclusion is quite high. For the rest of 2023, the federal estate tax exclusion is $12.92 million. Each year, it is indexed for inflation, so you will see a somewhat higher figure in 2024.
The estate tax exclusion is portable between spouses, so you can transfer any amount of property to your spouse tax-free. Plus, a surviving spouse can use the exclusion that was allotted to their deceased spouse, so they would have two exclusions to utilize.
There is a federal gift tax in place to prevent people from giving away all their assets while they are living to sidestep taxation. It is unified with the estate tax, so the multimillion dollar exclusion is a unified exclusion that includes large lifetime gifts and your estate.
Pending Federal Estate Tax Exclusion Reduction
On a cautionary note, a key provision in the Tax Cuts and Jobs Act of 2017 is going to expire or sunset on January 1, 2026. When that day comes, if there is no relevant legislation passed in the meantime, the exclusion will revert back down to the 2017 level.
During that year, the federal estate tax exclusion was $5.49 million. In 2026, there would be an inflation adjustment added to this $5.49 million figure to reflect the current economic realities.
Schedule a Consultation Today!
Navigating the landscape of estate taxes can be complicated. As an estate planning law firm, we can guide you through these complexities and help you strategize to minimize your estate tax burden if your estate will be exposed.
At the same time, we can help you devise a tailor-made plan that is perfect for you and your family if you do not have tax concerns. To get started, call our Phoenix, AZ estate planning office at 888-222-1328 or send us a message through our contact page requesting a consultation.
This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.
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